Entertainment Allowance: Tax Treatment & Example

1. Definition & Applicability

Entertainment Allowance is a special allowance given to employees to cover expenses incurred for hospitality/entertainment of clients/business associates. Its tax treatment differs for:

• Government Employees(Partial exemption available)
• Private Sector Employees(Fully taxable)

2. Tax Treatment as per Income Tax Act

For Government Employees [Section 16(ii)]

• Exemption:Least of:
  • Actual Entertainment Allowance received
  • ₹5,000 per annum
  • 20% of basic salary
• Taxable Portion:Amount exceeding exemption limit

For Private Sector Employees

• No exemption allowed
• Fully taxableas part of salary income

3. Calculation Example

Case 1: Government Employee

• Basic Salary: ₹6,00,000 p.a.
• Entertainment Allowance: ₹60,000 p.a.

Exemption Calculation:

1. Actual allowance received = ₹60,000
2. Statutory limit = ₹5,000
3. 20% of basic salary = ₹1,20,000 (20% of ₹6,00,000)

Exempt Amount = Least of above = ₹5,000
Taxable Entertainment Allowance = ₹60,000 – ₹5,000 = ₹55,000

Case 2: Private Sector Employee

• Basic Salary: ₹8,00,000 p.a.
• Entertainment Allowance: ₹50,000 p.a.

Taxable Amount = ₹50,000 (fully taxable)

4. Key Points to Remember

• Only government employeescan claim deduction
• Must be specifically grantedas entertainment allowance
• No exemption under New Tax Regime
• Documentation:No need to submit expense proofs (unlike LTA/HRA)

5. Comparison: Govt vs Private Employees