Mr. Krishna, aged 38 years, is entitled to a salary of 40,000 per month. He is given an option by his employer either to take house rent allowance…

Computation of tax liability of Krishna 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 (10% of 4,80,000) N.A. 48,000 House rent Allowance (₹ 8,000 x 12 Months) 96,000 Less: Exempt u/s 10(13A) – least of the following - - 50% of Basic Salary - 2,40,000 - Actual HRA received - 96,000 - Rent paid less 10% of salary - 30,000 66,000 Gross Salary 5,46,000 5,28,000 Less: Standard deduction u/s 16(ia) 50,000 50,000 Net Salary 4,96,000 4,78,000 Less: Deduction under Chapter VI-A - - Total Income 4,96,000 4,78,000 Tax on total income 12,300 11,400 Less: Rebate under section 87A - Lower of 12,500 or income-tax, since total income does not exceed - 5,00,000 12,300 11,400 Total tax payable Nil Nil Cash Flow Statement Particulars Option I - HRA Option II - RFA Inflow: Salary 5,76,000 4,80,000 Less: Outflow: Rent paid (78,000) Tax on total income Nil Nil Net Inflow 4,98,000 4,80,000 Since the net cash inflow under Option I (HRA) is higher than in Option II (RFA), it is beneficial for Mr. Krishna to avail Option I, i.e., House Rent Allowance