Introduction to Entertainment Allowance:
- Employer pays monthly allowance to the employee to meet his expenses for entertainment for motivation. Such allowance is called as entertainment allowance.
Entertainment allowance is taxable. However deduction from taxable salary is allowed to some extent u/s 16(ii) as given below:
If assessee is a government employee (only), the least of the following three is exempted from tax u/s 16(ii).
- The maximum limit amount of Rs.5000/- is considered.
- 20% of value of Basic Pay which is computed under entertainment allowance.
- The actual entertainment allowance which is provided by the employer to the employee
- If assessee is a private employee including employees of statutory corporation and local authority, the entire entertainment allowance is taxable i.e allowances is not deductible, and are completely chargeable to tax.
- Section 10(14) provides that in computing the total income of a person, any special allowance or benefit, not being in the nature of entertainment allowance or other perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose, shall not be included.
- Mr. M is an employee of Gujarat government gets Rs. 1,20,000/- as basic pay. He is also getting the entertainment allowance for Rs.15,000/-, Rs. 10,000/- as DA and Rs. 15,000/- as house rent allowance.
Gross salary would be: Rs. 1,60,000 (1,20,000+15,000+10,000+15,000).
Basic pay is only considered for computing salary for entertainment allowance. Rs. 1,20,000/- is the basic pay which is to be considered for entertainment allowance.
On computing the entertainment allowance the least of the following three is exempted from tax.
- The maximum limit of 5,000/- is considered for computation of entertainment allowance.
- The 20% of salary i.e.20%*1,20,000 = 24,000 is considered for computation of entertainment allowance.
- The actual entertainment allowance of Rs.15000 is considered for computation of entertainment allowance.
The exempted EA u/s 16(ii) is Rs. 5000/- which is to be deducted from gross salary that includes entertainment allowance also. Hence, taxable salary will be Rs. 1,55,000/-. (Rs. 1,60,000-Rs. 5,000/-).
- Mr.N is an employee of X ltd., gets Rs. 1,80,000/- as basic pay. He is getting the entertainment allowance for Rs. 25,000/-, Rs. 20,000/- as DA and Rs. 5000/- as High cost of living allowance.
Gross salary would be: Rs. 2,30,000 (1,80,000+25,000+20,000+5,000).
As X is a private employee, the entire entertainment allowance Rs. 20,000/- is taxable. Nothing is exempted from tax. Hence, taxable salary will be Rs. 2,30,000/-.
By: Sensys Technologies
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