China has for the first time detailed a clear-cut cap on the public housing funds that can be exempted from individual taxation.

Contributions evenly paid by employers and workers to the public housing fund can be tax free if each side pays no more than 12 percent of an individual's average monthly salary in the previous year, the Ministry of Finance said in a notice on its Website on Thursday.

Contributions to the fund that exceed the cap will be counted as taxable income, the notice said.

Both employers and employees paid the same amount to the public housing fund monthly and these funds can be used by individuals to buy a home and apply for a mortgage.

Home buyers can enjoy a housing loan, whose rate is about one percentage point lower than a commercial mortgage, to pay for a property. Individuals can borrow up to 200,000 yuan (US$25,000) from the public housing fund for this purpose.

The contribution, whose proportion is set by local governments, should be at least 5 percent of the individual's average salary a year ago. The central government allows a 12 percent cap "in general" in a rule announced in 2005, which indicates that in some cases the local governments can increase the cap.

Yesterday's notice cleared the ambiguity in the past.

At present, several provincial and municipal governments set the level below the 12 percent cap. 

(Shanghai Daily July 7, 2006)