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Entertainment Allowance: Meaning, Exemption, Deduction & Calculation

By Ektha Surana


Updated on: Jan 22nd, 2024


5 min read

Entertainment allowance means the extra expenses which salaried individuals receive as a part of their income. Entertainment allowance is the amount the company gives to employees for their expenses on drinks, hotel stay, meals, movies etc. Entertainment allowance is entirely taxable for employees working at private companies, whereas government employees receive exemptions based on a few conditions. 
Find out more on this matter in the article below.

What is an entertainment allowance deduction?

Entertainment allowance deduction is the provision that allows individuals to reduce the burden of taxes on their income. Entertainment allowance is first added to an individual’s income, and then a certain amount is deducted. Section 16(ii) of the Income Tax Act puts entertainment allowance under the head ‘Salaries’ and gives a detailed account of the applicable deductions.

How is the entertainment allowance computed for government employees?

As per section 16(ii), Government employees can claim a deduction for entertainment allowance by considering the lowest from the following: 

  • 20% of an individual’s basic salary
  • Rs.5,000
  • Entertainment allowance amount received in the financial year

This deduction is not available for individuals working in private firms or any statutory or local authorities. 

How is the entertainment allowance calculated?

Entertainment allowance calculation is done based on the following parameters:

  • Individuals’ salaries must be the gross amount they receive without including any benefits. Moreover, it should not include any perquisites or any other allowances.
  • Actual amount spent by an individual from the received entertainment allowance must not be considered. 

Let’s look at an example of the entertainment allowance deduction for a better understanding:

Individual’s Salary (not including perquisites, benefits, and allowances)Rs.2,20,000
Entertainment Allowance For The Entire Financial Year Rs.22,000
  • Therefore, the amount of deductible available will be:
20% of the salaryRs.44,000
Actual Amount Received By An IndividualRs.22,000
Allowed Deduction AmountRs.5,000

Is entertainment allowance a part of the salary?

Yes, entertainment allowance forms a part of your salary income. If you are a government employee, you can claim an entertainment allowance deduction depending on a few conditions. Furthermore, your employer must classify that allowance as entertainment allowance for it to be eligible for a tax deduction. 

Who is eligible for deduction of entertainment allowance u/s 16(ii)?

Only Government employees are eligible for entertainment allowance deductions under Section 16(ii). They can claim a deduction of Rs.5,000, 20% of their gross salary or the actual entertainment allowance received in a financial year, whichever is lower.

Is entertainment allowance taxable?

Entertainment allowance is taxable for both Government and private sector employees. However, government employees get tax deduction benefits provided the allowance is included within the gross salary.

What amount of entertainment allowance is exempt for non-government employees?

Entertainment allowance for non-government employees is not exempt from tax. It is fully taxable for them.

Now that you know the meaning of entertainment allowance in income tax, you may be wondering how to claim entertainment allowance deductions. Well, your entire entertainment allowance amount is included in your gross salary. Thus, you can claim it under the head ‘Salary Income’ at the time of IT return filing.  

Illustration on calculation of deduction against entertainment allowance

SalaryRs 1,20,000
Entertainment allowance per monthRs 1,000
Entertainment allowance per yearRs 12,000
Amount of deduction available: 
20% of salary (a)Rs 24,000
Rs 5,000 (b)Rs 5,000
Actual Amount Received (c)Rs 12,000
The amount allowed as a deduction (least of a, b and c)Rs 5,000

Professional Tax or Tax on Employment Under Section 16 (iii)

You must keep the following points in mind while computing professional tax deductions:

1. Only in the fiscal year in which the professional tax is actually paid to the government may the taxpayer claim the deduction.

2. The employer's tax paid on behalf of the employee is also deductible. In this case, the amount paid by the employer as professional tax will be included first as a requirement in the total wage. Later, the same amount will be deducted under Section 16.

3. The deduction has no upper or lower limit under Section 16 of the Income Tax Act. The deduction is purely based on the amount of professional tax paid. However, no state government may collect a professional tax of more than Rs 2500 per year. Only the tax paid is deductible; interest or late fees for late or nonpayment of professional tax are not.

Frequently Asked Questions

Which class of employers are required to pay gratuity to their employees?

Employers with more than 10 employees are required to provide gratuity. Moreover, the employees need to have completed the minimum service period of 5 years under the same employer to be eligible for receiving gratuity.

Do I need to submit proof of expenses to claim the standard deduction?

Earlier, to claim a deduction you had to submit medical and travel bills. These bills were then reviewed by your employer and a deduction was allowed. However, to claim a standard deduction you don't need to submit any bills. You will receive the deduction by default without any conditions for submitting bills.

Can my employer refuse to provide a standard deduction?

No, it is mandatory to provide for standard deduction while calculating tax payable, deducting TDS, and filing an income tax return.

How to enter standard deductions while filing an income tax return?

A taxpayer can either file ITR through ‘Download Utility’ mode or ‘Prepare and Submit Online’ mode. In case of Prepare and Submit Online mode, the details will be pre-filled, you must check the details and then file. In the case of ‘Download Utility’ mode, you need to enter the details and then submit the ITR.

About the Author

Multitasking between pouring myself coffees and poring over the ever-changing tax laws. Here, I've authored 100+ blogs on income tax and simplified complex income tax topics like the intimidating crypto tax rules, old vs new tax regime debate, changes in debt funds taxation, budget analysis and more. Some combinations I like- tax and content, finance & startups, technology & psychology, fitness & neuroscience. Read more


Quick Summary

Entertainment allowance is an additional income part for salaried individuals used for expenses. It is taxable for private sector staff but government workers have exemptions. It's deducted before tax under Section 16(ii) of Income Tax Act. Govt. employees can claim a deduction based on the lowest of specific criteria. The allowance is taxable for all employees, but deductions can be claimed by govt. employees. Professional tax deductions have specific conditions.

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