For example,let us assume that you reside in a metro, in a house provided by your employer, who pays rent and incurs a monthly expenditure of Rs.30,000 on it. And say, your monthly salary excluding perquisites, is Rs.50,000. Since the fair rental value of the house (Rs.30,000) amounts to 60 per cent of your salary, the taxable perquisite value of the rent-free house would be just 10 per cent of your salary, or Rs.5,000 per month. The effective reduction in your monthly taxable income: Rs.25,000.
House rent allowance. Instead of providing a rent-free house, most companies prefer to pay house rent allowance (HRA) to employees. Your HRA is exempt to the extent of the least of the following:
1. Excess of rent paid over 10 per cent of salary.
2. 50 per cent of salary (if you reside in any of the four metros).
3. 40 per cent of salary (for places other than the four metros).
4. Actual allowance paid.
Effectively, HRA of up to 10 per cent of your salary is taxable. You can avail of an exemption only when the rent paid by you exceeds 10 per cent of your salary.
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