Entertainment Tax: Deduction from Salary | Salary Income

Entertainment Tax: Deduction from Salary | Salary Income

Deduction from salary: Professional Tax and Entertainment tax

Compensation received by an employee from his employer if taxable in the hands of employee under the head “Salaries”. Salary is chargeable to tax under on due or receipt basis whichever is earlier as per section 15 of the Income Tax Act. Such salary is taxed after allowing the following deductions under section 16 (ii) and (iii); viz.

1)      Entertainment Allowance – Section 16 (ii)

2)      Professional Tax  - Section 16 (iii)

The above points are very easy to understand and lets understand it more effortlessly with the help of the explanation given below.

Entertainment Allowance:

Entertainment Allowance is the amount paid to employee to use it for the purpose of hospitality of customers.

Entertainment Allowance is given as a part of salary. It is taxable in the hands of employee as per the provisions of Section 16(ii). The section states as follows:

Section 16 (ii)

16 The income chargeable under the head “Salaries” shall be computed after making the following deductions;

(ii) a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less.

Let us understand it more clearly with the help of an example:

Example:

The details for the financial year 2012-13 of Mr. X an employee in PGVCL is given below:

Salary                                                                            Rs. 7,00,000 p.a. (Including D.A. Rs. 1 Lakh)

Entertainment Allowance                                    Rs. 8,500 p.a.

HRA                                                                               Rs. 1,00,000 p.a.

Calculate Deduction under section 16 (ii) as well as taxable entertainment allowance.

Solution:

Deduction under section 16 (ii):

Lower of the following is allowed as a deduction:

i)   1/5^th of the Basic Salary (Note 1)                                                                  Rs. 1,20,000

ii)  Amount Specified in section 16 (ii)                                                                   Rs. 5,000

iii) Entertainment Allowance Actually Received                                               Rs. 8,500

Thus, the lowest amount is Rs. 5,000 and it is allowed as a deduction under section 16 (ii).

Taxable Entertainment Allowance:

           Entertainment allowance actually received                                                       Rs. 8,500

Less: Deduction under section 16 (ii) (as above)                                                         Rs. 5,000

                        Taxable Entertainment Allowance                                                          Rs. 3,500

Note (1)

1/5^th of basic salary    = [(7,00,000-1,00,000)/5] = Rs. 1,20,000

According to provision Basic salary is to be considered. So, D.A. Rs. 1,00,000 is to be excluded.

Points regarding Expert Knowledge:

-          The following is not to be considered for the purpose of claiming deduction under section 16 (ii):

o   Amount actually received as entertainment allowance Less Amount actually spent for entertainment.

-          Thus, there is no need to prove whether such amount is actually spent for hospitality of customer or not. This was held in the case of CIT vs. Kamal Devi [1971] 81 ITR 773 (Delhi).