The maximum amount of House Rent Allowances (H.R.A.) permitted to be enjoyed by an employee tax-free is up to 50% of the salary in the metros namely Delhi, Kolkata, Mumbai and Chennai and 40% in other cities.
If you notice carefully, there is a clause of “up to” and not flat. This was quite interesting to me when I figured that out. Why not keep it flat? The following is the reason. The government wants some amount of money to be paid by the employee from his pocket which does comes back to exchequer. According to 2A section of the Income Tax Act, the employee has to bear a minimum of 10% of the salary as Rent so that he can get the full benefit of 50% or 40% depending on where he is located. Continue reading