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Taxation of Entertainment allowance and children education allowance under income tax act 1961


Posted Date: 13-Nov-2012  Last Updated:   Category: General Finance articles    
Author: Member Level: Silver    Points: 30

This article is going to explain about the entertainment allowance and children education allowance. Entertainment allowance is exempted u/s 16(ii) seperately but children education allowance is provided as deduction from value of children education allowance which is provided by employer. Entertainment allowance which is provided by the employer is included in gross salary and the exemption is deducted as 16(ii) from gross salary. Children education allowance is exempted upto Rs.100/- per month per child.


Introduction to entertainment allowance and children education allowance


Employer pays monthly allowance to the employee to meet his expenses for entertainment for motivation. Such allowance is called as entertainment allowance. Such allowance is taxable but some of exemption is provided to employee in particular case.
Employer provides monthly allowance to the employee to meet the educational expenses of his children. such allowance is called as children education allowance. Some amount of exemption is provided to such allowance and the remaining amount of allowance is taxable.


Computation taxation and exemption of entertainment allowance


If assessee is a private employee, the entire entertainment allowance is taxable.If assessee is a government employee, the least of the following three is exempted from tax u/s 16(ii).

  1. The maximum limit amount of Rs.5000/- is considered.

  2. The 20% of value of salary which is computed under entertainment allowance.

  3. The actual entertainment allowance which is provided by the employer to the employee.


Basic pay is only considered for computation of salary for computing the Entertainment allowance.


Procedural approach


On calculating net salary the entertainment allowance is deducted from gross salary as deduction u/s 16(ii). The entire EA is included in taxable value of salary for calculating gross salary. In case of private employee the sec.16(ii) is not applicable therefore the entire EA is included in taxable value of salary for calculating gross salary but nothing is given as exemption.


Illustration


Mr.x is an employee of Gujarat government gets Rs.120000/- as basic pay. He is getting the entertainment allowance for Rs.15000/-. He is getting Rs.10000/- as DA.He is getting Rs.15000/- as house rent allowance.

Basic pay is only considered for computing salary for entertainment allowance. Rs.120000/- is the basic pay which is only considered for salary for entertainment allowance.

On computing the entertainment allowance the least of the following three is exempted from tax.

  1. The maximum limit of Rs.5000/- is considered for computation of entertainment allowance.

  2. The 20% of salary i.e.20%*120000 = 24000 is considered for computation of entertainment allowance.

  3. 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 deducted from gross salary that includes entertainment allowance also.


Illustration


Mr.x is an employee of AP government gets Rs.150000/- as basic pay. He is getting the entertainment allowance for Rs.20000/-. He is getting Rs.15000/- as DA.He is getting Rs.2000/- as city compensation allowance.

Basic pay is only considered for computing salary for entertainment allowance. Rs.150000/- is the basic pay which is only considered for salary for entertainment allowance.

On computing the entertainment allowance the least of the following three is exempted from tax.

  1. The maximum limit of Rs.5000/- is considered for computation of entertainment allowance.

  2. The 20% of salary i.e. 20%*150000 = 30000 is considered for computation of entertainment allowance.

  3. The actual entertainment allowance of Ra.20000/- is considered for computation of entertainment allowance.


The exempted EA u/s 16(ii) is Rs.5000/- which is deducted from gross salary that includes entertainment allowance also.


Illustration


Mr.x is an employee of X ltd., gets Rs.180000/- as basic pay. He is getting the entertainment allowance for Rs.25000/-. He is getting Rs.20000/- as DA.He is getting Rs.5000/- as High cost of living allowance.

As X is a private employee, the entire Rs.20000/- is taxable. Nothing is exempted from tax.


Computation of taxation and exemption of children education allowance


Employer provides allowance to meet the expenses of education of children of the employee. Employee pays monthly charge for their children education. To meet such expenses, employer provides some amount per month as children educational allowance. As the some sections are included in income tax act 1961, up to Rs.100/- per children per month for only two children are exempted from tax and the balance is taxable.


Illustration


Mr.z gets Rs.120000/- as basic pay. He gets Rs.1500/- p.m. as entertainment allowance. He gets Rs.20000/-p.m as house rent allowance. He gets Rs.500/- p.m. as children education allowance for his two children equally.

Actual children education allowance is Rs.6000.The exemption for two children is Rs.2400 because Rs.100/- p.m. per child is exempted. Taxable children education allowance is Rs.3600.
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