Entertainment Allowance: Meaning, Exemption, Deduction & Calculation

Entertainment allowance means the extra expenses that salaried individuals receive as part of their income. It is the amount the company gives to employees for their expenses on drinks, hotel stays, meals, movies, etc. Entertainment allowance is entirely taxable for employees working at private companies, whereas government employees receive exemptions based on a few conditions.  

We have discussed provisions regarding the same in this article;

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 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. 

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:

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.

Deduction in respect of entertainment allowance would be available to an assessee only if chooses to pay taxes as per the old tax regime under section 115BAC(1A). The deduction would not be available under the new tax regime.

Is Entertainment Allowance Taxable?

Entertainment allowances are taxable for both Government and private sector employees. However, government employees get tax deduction benefits provided the allowance is included in 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

The amount of Rs. 5000 is to be deducted from the Total salary, which will give you the Gross Salary to further calculate the total income. 

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. Under Section 16 of the Income Tax Act, the deduction has no upper or lower limit. It 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.