Kavi is earning a salary of ₹ 40,000 per month from Pranshul Ltd. He is given an option by his employer either to take house rent allowance or a rent free accommodation which is owned by the company. The HRA payable was

Computation of Tax liability of Kavi under both the options Particulars Option I HRA (₹) Option II RFA (₹) Basic Salary (40,000 x 12 months) 4,80,000 4,80,000 Perquisite value of rent-free accommodation (15% of ₹ 4,80,000) 72,000 House Rent Allowance (₹ 7,000 x 12 months) 84,000 Less: exempt u/s.10(13A): Least of the following: Rent paid less 10% of salary (₹ 6,000 x 12 - 10% of ₹ 4,80,000 = ₹ 72,000 - ₹ 48,000) 24,000 Actual HRA received 84,000 50% of Basic Salary (50% of ₹ 4,80,000) 2,40,000 Exemption (24,000) Gross Salary 5,40,000 5,52,000 Less: Standard Deduction u/s 16(ia) (50,000) (50,000) Net Salary 4,90,000 5,02,000 Less: Deduction under chapter VI-A - - Total Income 4,90,000 5,02,000 Tax on Total Income 12,000 12,900 Less: Rebate under section 87A 12,000 Nil Lower of ₹ 12,500 or income tax of ₹ 12,000, since the total income does not exceed ₹ 5,00,000 Nil 12,900 Add: Health and Education Cess @ 4% Nil 516 Total tax payable Nil 13,416 Tax Payable (Roundoff) Nil 13,420 Cash Flow Statement Particulars Option I HRA (₹) Option II RFA (₹) Inflow: Salary and HRA Received 5,64,000 4,80,000 Less: Outflow Rent paid (72,000) Nil Tax on total income Nil (13,420) Net Inflow 4,92,000 4,66,580 Conclusion: Since the net cash inflow under option I (HRA) is higher than in Option II (RFA), it is beneficial for Kavi to avail Option I, i.e. to take House Rent Allowance.