Tax deduction benefits on the entertainment allowance, and employment/professional tax

Updated: 01.02.2023

Tax deductions and tax exemptions are distinct from each other. The tax deductions are typically a portion of income excluded from total taxable income. The salaried person who opts for a new regime under section 115BAC is not eligible to claim deductions for exemptions of professional tax, and entertainment allowance on salaries. An assessee who opts for the old regime of tax assessment is still eligible for these deductions. Here, we list out the deductions allowed for salaried classes.

Standard Deduction [U/s 16 (ia)]: Rs.50000 or the amount of salary, whichever is lower:

The standard deduction is essentially a flat amount subtracted from the salary income before the calculation of the taxable income of the salaried class. In the interim budget of 2019, the Finance Minister of India announced that the standard deduction limit of Rs.40000 for 2017-18 has been increased to Rs.50000 for the financial year 2018-19. The same amount of deduction is continuing for FY 2020-21. While reintroducing the standard deduction in the budget 2018, the Government removed the transport allowance of Rs.19200 and medical reimbursement of Rs.15000 available for deduction to a salaried employee. The Standard deduction of Rs 50,000 to salaried individuals/pensioners and deduction from family pensions up to Rs.15000, is earlier allowed only under the old regime. It is now proposed in the budget 2023 to allow these two deductions under the new regime also.

Entertainment Allowance [Section 16 (ii)]:

Entertainment allowance is an amount paid by an employer to its employees for the purpose of the hospitality of the customers. The entertainment allowance received by employees other than Government employees is included under the head ‘salaries’ which is a fully taxable income. The entertainment allowance received by the employees of the statutory corporation and local authority is also not eligible for deduction from salary and the amount is fully charged to tax. In the case of Government employees, allowance is included under the head salaries least of the following is deductible:

a) Rs.5000

b) 1/5th of salary (For this purpose “salary” excludes any allowance, benefit or other perquisites

c) Actual entertainment allowance received [Note: Amount actually spent towards entertainment, out of entertainment allowance received, is not taken into consideration]

Employment Tax/Professional Tax under section 16(iii):

Professional Tax is levied in some states of India on all kinds of professions, and employment-based on the income from profession or salary. Article 276 of the Constitution which empowers the State Government to levy professional tax also has provided for a maximum cap of Rs.2500 beyond which professional tax cannot be charged on any person.  The amount actually paid by an employee towards employment tax/professional tax during the year is deductible under section 16(iii) of IT act. However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite, and then the same amount is allowed as deduction.

Source Income tax department:

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