Section 16(ii) of the Income Tax Act is an often-overlooked provision, but it can offer meaningful tax relief, especially to salaried individuals. This section allows for a specific deduction from your salary income – the entertainment allowance. It’s not just a technical term; this allowance can help reduce your taxable income, provided certain conditions are met.
Let’s break it down and understand what it truly means for taxpayers, especially those in government employment.
What is Section 16(ii) of the Income Tax Act?
Section 16(ii) of the Income Tax Act allows for a deduction in respect of any allowance, like an entertainment allowance. But there’s a catch – this benefit is only available to government employees. If you're in the private sector, this section unfortunately does not apply to your salary.
Still, for those who qualify, this deduction can be meaningful. Salaried individuals who receive an entertainment allowance can claim a deduction under this section, subject to a few limits and conditions.
Who Can Claim It?
As mentioned earlier, this deduction is only available to government employees, whether working at the central or state level. If you're a salaried individual in such a role and receive an entertainment allowance, you may claim a deduction under Section 16(ii) of the Income Tax Act for AY 2022-23, AY 2023-24, or any relevant year.
How Much Can Be Claimed?
Here’s where it gets interesting. While there is no limit on the amount an employer can pay as an entertainment allowance, the deduction allowed under section 16(ii) is restricted to the least of the following:
- ₹5,000;
- 20% of your basic salary; or
- Actual entertainment allowance received.
The lowest of the three is what you can claim as a deduction.
Real-World Example
Suppose Mr. Sharma, a central government employee, receives a basic salary of ₹3,00,000 annually and an entertainment allowance of ₹15,000.
His deduction under section 16(ii) of the Income Tax Act would be the lowest of:
- ₹5,000
- 20% of ₹3,00,000 = ₹60,000
- ₹15,000
Thus, he can claim ₹5,000 as a deduction from his salary income."
What Does Entertainment Allowance Mean?
The entertainment allowance is an amount paid by the employer to the employee for expenses related to official entertainment, such as hosting clients or other official events. While you can receive any amount, the deduction benefit is limited as per the criteria above.
What Other Deductions Come Under Section 16?
Apart from the deduction in respect of any allowance like an entertainment allowance, Section 16 of the Income Tax Act also provides:
- Standard Deduction of ₹50,000 (for all salaried individuals)
- Professional Tax Deduction
So yes, Section 16(ii) allows you to claim a tax deduction on the same entertainment allowance, but it also sits alongside other deductions like standard & professional tax, providing overall relief to employees."
Why It Matters?
Even though ₹5,000 may seem small, every deduction counts when filing your Income Tax Return. Understanding how section 16(ii) of the Income Tax Act limits apply to your salary can help optimise your tax saving legally.
Final Words
If you're a government employee & receiving an entertainment allowance, don’t forget to utilise the benefits offered under Section 16(ii). It’s a legal way to reduce your taxable income & make the most of the deductions from your salary income.
Need help claiming salary-based deductions or filing your return correctly? Let our experts at Callmyca.com simplify it for you. Click here to save your taxes the smart way!
