This is one of Madrid´s best terrazas (and more disputed as well) for summer. It is in the heart of the bohemian neighborhood Malasaña, just near Plaza de Carlos Cambronero, a very transited place on the summer weekend afternoons. You can live the city just by sitting here and have a beer.
Because you can feel the city just by sitting in the terraza and having lunch and a beer. The food is also great; the alcachofas con jamon (artichokes with crunchy jamon) and the Tacos de Rabo de Toro (ox tail tacos) are my favorites. It isn´t the average budget meal but depending on what you eat you can pay less than you think.
Sit outside. If they try to put you inside, give up, doesn´t worth it.