Entertainment Allowance: Meaning, Exemption, Deduction & Calculation

Entertainment allowance means the extra expenses that salaried individuals receive as part of their income. It refers to the amount provided by employer to employee for organizing entertainment events, hotel stays, meals, movies, etc. Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following deduction is to be made from gross salary. However, deduction in respect of entertainment allowance is available in case of Government employees only based on few conditions and entirely taxable for private companies.

What is an Entertainment Allowance Deduction?

• Entertainment allowance forms a part of your salary income. Deduction for the same is provided that allows individuals to reduce the burden of taxes on their income.
• It 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.
• 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.

How is Entertainment Allowance Computed for Government Employees?

As per section 16(ii),  deduction of Entertainment Allowance to Government employee under the old tax regime. 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

This deduction is not available for individuals working in private firms or any statutory or local authorities. This deduction is exclusively available for old regime. Tax payers opting for new tax regime cannot claim entertainment allowance.

Calculation of Entertainment Allowance

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.
• The 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:

• Therefore, the amount to be deductible available will be:

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.