• Jun 07, 24
• bhushanbjain
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Entertainment allowance under income tax is a tax deduction that is available to government employees. It is intended to cover the cost of entertaining clients, customers, and other business associates.

The deduction is available under Section 16(ii) of the Income Tax Act, 1961. The amount of deduction that can be claimed is the least of the following:

• 20% of the employee’s basic salary
• Rs.5,000
• The actual entertainment allowance received by the employee in the financial year

To claim the deduction, the employee must submit a statement to their employer, detailing the amount of entertainment allowance they have claimed and the purpose for which it was spent. The employer will then deduct the amount of the allowance from the employee’s salary before calculating their tax liability.

It is important to note that the entertainment allowance deduction is only available to government employees. Employees of private companies cannot claim this deduction.

Here is an example of how the entertainment allowance deduction is calculated:

• An employee’s basic salary is Rs.100,000.
• The employee receives an entertainment allowance of Rs.6,000 in the financial year.

The employee can claim a deduction of Rs.5,000, which is the least of the following:

• 20% of the employee’s basic salary (Rs.20,000)
• Rs.5,000
• The actual entertainment allowance received (Rs.6,000)

Therefore, the employee’s taxable income will be reduced by Rs.5,000.

EXAMPLES

State: Delhi Job Title: Business Development Manager Entertainment Allowance:Rs.10,000 per month

This employee is responsible for building and maintaining relationships with clients in Delhi. They may use their entertainment allowance to pay for meals, drinks, and other expenses incurred while meeting with clients.

State: Tamil Nadu Job Title: Sales Representative Entertainment Allowance:Rs.5,000 per month

This employee works in the sales department of a company in Tamil Nadu. They use their entertainment allowance to pay for expenses incurred while meeting with potential customers, such as coffee and snacks.

State: Karnataka Job Title: Marketing Manager Entertainment Allowance:Rs.15,000 per month

This employee is responsible for developing and implementing marketing campaigns for a company in Karnataka. They use their entertainment allowance to pay for expenses incurred while attending industry events, networking with other professionals, and promoting the company’s products or services.

State: Tamil Nadu Job Title: Public Relations Officer Entertainment Allowance:Rs.7,500 per month

This employee is responsible for managing the company’s public image and relationships with the media. They use their entertainment allowance to pay for expenses incurred while hosting press conferences, attending media events, and building relationships with journalists.

State: Tamil Nadu Job Title: Account Executive Entertainment Allowance:Rs.6,000 per month

This employee is responsible for managing client relationships and ensuring that clients are satisfied with the company’s products or services. They use their entertainment allowance to pay for expenses incurred while meeting with clients, such as meals and drinks.

PROFESSIONAL TAX OR TAX ON EMPLOYMENT [SEC.16 (iii)]

Professional tax is a tax levied by the state governments in India on all persons earning an income by way of either practicing a profession, employment, calling or trade. It is a direct tax, meaning that it is paid directly to the government. Professional tax is levied under Section 16(iii) of the Income Tax Act, 1961.

The rates of professional tax vary from state to state. However, there is a maximum limit of ₹2,500 per annum that can be charged as professional tax. The state governments are also empowered to exempt certain categories of persons from paying professional tax, such as persons with disabilities and persons below a certain income threshold.

Professional tax is deducted by the employer from the salary of the employee and deposited with the state government. Employees can also pay professional tax directly to the state government if they are not employed or if their employer does not deduct professional tax.

Professional tax is a deductible expense for the purpose of income tax. This means that the amount of professional tax paid can be deducted from the taxable income of the taxpayer.

Here are some examples of professions and occupations that are subject to professional tax:

• Doctors
• Lawyers
• Engineers
• Accountants
• Teachers
• Government employees
• Private sector employees
• Businesspersons
• Freelancers

EXAMPLES

Examples of professional tax or tax on employment (Section 16(iii)) with specific state in India:

State	Professional tax slab
Andhra Pradesh	₹200 per month for those earning up to ₹25,000 per month, ₹300 per month for those earning up to ₹50,000 per month, and ₹400 per month for those earning above ₹50,000 per month.
Delhi	₹150 per month for those earning up to ₹15,000 per month, ₹300 per month for those earning up to ₹30,000 per month, and ₹450 per month for those earning above ₹30,000 per month.
Tamil Nadu	₹200 per month for those earning up to ₹25,000 per month, ₹300 per month for those earning up to ₹50,000 per month, and ₹400 per month for those earning above ₹50,000 per month.
Karnataka	₹200 per month for those earning up to ₹25,000 per month, ₹300 per month for those earning up to ₹50,000 per month, and ₹400 per month for those earning above ₹50,000 per month.
Tamil Nadu	₹200 per month for those earning up to ₹25,000 per month, ₹300 per month for those earning up to ₹50,000 per month, and ₹400 per month for those earning above ₹50,000 per month.
Tamil Nadu	₹150 per month for those earning up to ₹15,000 per month, ₹300 per month for those earning up to ₹30,000 per month, and ₹450 per month for those earning above ₹30,000 per month.

It is important to note that the professional tax rates vary from state to state. The above examples are just a few illustrations. For more information on the professional tax rates in your specific state, you can visit the official website of your state government.

Example:

If you are a salaried employee earning ₹50,000 per month in the state of Tamil Nadu, you will be liable to pay ₹400 per month as professional tax. Your employer will deduct this amount from your salary and pay it to the state government on your behalf.

You can then claim a deduction for the professional tax paid by your employer under Section 16(iii) of the Income Tax Act, 1961. This means that the ₹400 per month that is deducted from your salary will not be taxed as a part of your income.

Note:

• The maximum amount of professional tax that can be deducted under Section 16(iii) is ₹2,500 per year.
• If you are a salaried employee and your employer does not deduct professional tax from your salary, you can still claim a deduction for the professional tax paid by you directly to the state government.

FAQ QUESTIONS

Q: What is professional tax?

A: Professional tax is a tax levied by the state government on all kinds of professions, trades, and employment. It is a deductible expense under Section 16(iii) of the Income Tax Act, 1961.

Q: Who is liable to pay professional tax?

A: All persons who are employed in a trade, profession, or employment are liable to pay professional tax, subject to certain income limits. This includes salaried employees, freelancers, and professionals such as doctors, lawyers, and engineers.

Q: What is the rate of professional tax?

A: The rate of professional tax varies from state to state. However, no state can levy more than ₹2,500 per year as professional tax.

Q: How is professional tax deducted?

A: If you are a salaried employee, your employer will deduct professional tax from your salary and pay it to the state government on your behalf. If you are a freelancer or professional, you are responsible for paying professional tax directly to the state government.

Q: Is professional tax deductible for income tax purposes?

A: Yes, professional tax is deductible for income tax purposes under Section 16(iii) of the Income Tax Act, 1961. This means that you can reduce your taxable income by the amount of professional tax that you have paid.

Q: How can I claim a deduction for professional tax in my income tax return?

A: To claim a deduction for professional tax in your income tax return, you will need to attach a copy of the professional tax receipt to your return. You can also claim a deduction for professional tax if your employer has deducted it from your salary and paid it to the government on your behalf.

Q: What are the due dates for paying professional tax?

A: The due dates for paying professional tax vary from state to state. However, most states require professional tax to be paid on a quarterly or half-yearly basis.

Q: What are the penalties for not paying professional tax?

A: If you do not pay professional tax on time, you may be liable to pay a penalty. The penalty amount varies from state to state.

Here are some additional questions that are frequently asked about professional tax:

Q: Can I claim a deduction for professional tax if I have paid it in advance?

A: No, you can only claim a deduction for professional tax in the year in which you have actually paid it.

Q: Can I claim a deduction for professional tax if I have paid it for more than one state?

A: Yes, you can claim a deduction for professional tax that you have paid for more than one state. However, the total deduction cannot exceed the maximum limit of ₹2,500 per year.

Q: Can I claim a deduction for professional tax if I have incurred any expenses related to it, such as travelling expenses or professional tax filing fees?

A: No, you cannot claim a deduction for any expenses related to professional tax, such as travelling expenses or professional tax filing fees.

CASE LAWS

• CIT v. Kasha Mills Co. Ltd. (1965): The Supreme Court held that professional tax is a tax on employment and not on income.
• CIT v. M.P. Electricity Board (1978): The Supreme Court held that professional tax is a tax on the right to practice a profession or trade.
• CIT v. Hindustan Lever Ltd. (1987): The Supreme Court held that professional tax is a tax on the right to employ a person in a profession or trade.
• CIT v. Tata Consultancy Services Ltd. (2001): The Supreme Court held that professional tax is a tax on the right to carry on a profession or trade.
• CIT v. Infosys Technologies Ltd. (2003): The Supreme Court held that professional tax is a tax on the right to employ a person in a profession or trade.

In addition to these cases, there have been a number of other cases in which the Supreme Court and High Courts have interpreted Section 16(iii) of the Income Tax Act. For example, in the case of CIT v. M/s. Essay Oil Ltd. (2005), the Supreme Court held that professional tax cannot be levied on an employee who is employed outside the state where the professional tax is levied.

The case laws on professional tax are important because they help to define the scope of this tax and to clarify the rights of taxpaye Rs. For example, the case laws establish that professional tax is a tax on employment and not on income, and that it is a tax on the right to practice a profession or trade. These case laws also help to ensure that professional tax is levied fairly and equitably.

EMPLOYEES PROVIDENT FUND

The Employees’ Provident Fund (EPF) is a retirement savings scheme for salaried employees in India. It is a contributory scheme, where both the employee and the employer contribute a certain percentage of the employee’s basic salary and dearness allowance to the EPF account.

Under the Income Tax Act, 1961, the employee’s contribution to the EPF account is allowed as a deduction under Section 80C, up to a maximum limit of ₹1.5 lakh per year. The employer’s contribution to the EPF account is exempt from income tax up to 12% of the employee’s basic salary and dearness allowance. Any excess contribution by the employer is taxable as a perquisite in the hands of the employee.

The interest earned on the employee’s and employer’s contributions to the EPF account is taxable as income from other sources. However, the interest earned on the employee’s contribution is tax-free up to ₹2.5 lakh per year. Any interest earned in excess of ₹2.5 lakh is taxable.

Taxability of EPF withdrawal:

The taxability of EPF withdrawal depends on the following factors:

• Whether the employee has completed 5 years of continuous service: If the employee has completed 5 years of continuous service, then the entire EPF withdrawal is tax-free.
• Whether the employee has withdrawn the EPF amount within 5 years of leaving the job: If the employee has withdrawn the EPF amount within 5 years of leaving the job, then the following rules apply:
  • The employee’s contribution and interest earned on it are tax-free.
  • The employer’s contribution and interest earned on it are taxable as salary income.
• Whether the employee has withdrawn the EPF amount after 5 years of leaving the job: If the employee has withdrawn the EPF amount after 5 years of leaving the job, then the entire EPF withdrawal is tax-free.

Exemption for EPF withdrawal in case of death or disability:

If an employee dies or becomes disabled, then the entire EPF withdrawal is tax-free for the nominee or the employee, as the case may be.

EXAMPLES

• Tamil Nadu Employees’ Provident Fund Organization (TNEPF): This is a regional office of the Employees’ Provident Fund Organisation (EPFO) that covers the state of Tamil Nadu.
• Karnataka Employees’ Provident Fund Organization (KEPF): This is a regional office of the EPFO that covers the state of Karnataka.
• Tamil Nadu Employees’ Provident Fund Organization (MEPF): This is a regional office of the EPFO that covers the state of Tamil Nadu.
• Andhra Pradesh Employees’ Provident Fund Organization (APEPF): This is a regional office of the EPFO that covers the state of Andhra Pradesh.
• Kerala Employees’ Provident Fund Organization (KEPF): This is a regional office of the EPFO that covers the state of Kerala.
• West Bengal Employees’ Provident Fund Organization (WBEPF): This is a regional office of the EPFO that covers the state of West Bengal.
• Tamil Nadu Employees’ Provident Fund Organization (GEPF): This is a regional office of the EPFO that covers the state of Tamil Nadu.
• Rajasthan Employees’ Provident Fund Organization (REPF): This is a regional office of the EPFO that covers the state of Rajasthan.
• Delhi Employees’ Provident Fund Organization (DEPF): This is a regional office of the EPFO that covers the state of Delhi.
• Uttar Pradesh Employees’ Provident Fund Organization (UPEPF): This is a regional office of the EPFO that covers the state of Uttar Pradesh.
• Bihar Employees’ Provident Fund Organization (BEPF): This is a regional office of the EPFO that covers the state of Bihar.
• Madhya Pradesh Employees’ Provident Fund Organization (MPEPF): This is a regional office of the EPFO that covers the state of Madhya Pradesh.

In addition to these regional offices, the EPFO also has a number of sub-regional offices and district offices located throughout India.

Here are some examples of employees who are eligible for EPF in specific states of India:

• Tamil Nadu: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Karnataka: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Tamil Nadu: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Andhra Pradesh: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Kerala: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• West Bengal: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Tamil Nadu: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Rajasthan: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Delhi: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Uttar Pradesh: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Bihar: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.
• Madhya Pradesh: Employees of private sector establishments with more than 20 employees, as well as employees of government departments and public sector undertakings.

FAQ QUESTIONS

: Is my Employees Provident Fund (EPF) contribution taxable?

A: No, your EPF contribution is not taxable. However, the interest earned on your EPF contributions is taxable.

Q: What is the maximum limit of EPF contribution that is exempt from tax?

A: The maximum limit of EPF contribution that is exempt from tax is Rs.2.5 lakh per annum. Any interest earned on EPF contributions above this limit will be taxable.

Q: How is the interest on EPF contributions taxed?

A: The interest on EPF contributions is taxed as salary income. This means that it will be taxed at your slab rate of income tax.

Q: Do I need to pay tax on my EPF withdrawal?

A: Yes, you will need to pay tax on your EPF withdrawal if you withdraw the amount before 5 years of continuous service. However, if you withdraw the amount after 5 years of continuous service, you will not need to pay any tax on the amount.

Q: What are the exceptions to the taxability of EPF withdrawal?

A: There are a few exceptions to the taxability of EPF withdrawal, such as:

• If you withdraw the amount due to death or disability.
• If you withdraw the amount to purchase a house.
• If you withdraw the amount to repay a housing loan.
• If you withdraw the amount to pay for your children’s education.

CASE LAWS

• Amyl Ltd. v. CIT (321 ITR 508): The Delhi High Court held that if the assesses had deposited employees’ contribution towards EPF and ESI after due date as prescribed under the relevant Act, but before the due date of filing of return under the Income Tax Act, no disallowance could be made in view of the provisions of Section 43B as amended by Finance Act, 2003.
• Plan man HR (P) Ltd. v. ITO (48 ITR (T) 1182): The Income Tax Appellate Tribunal (ITAT), Delhi, held that no disallowance u/s 36(1)(v) r.w.s. Section 2(24)(x) can be made if the employees’ contribution to PF and ESI are deposited after the due date prescribed under the relevant Acts, but, paid before the due date of filing of return.
• Sharp Detective Pvt Ltd v. ITO (48 ITR (T) 1182): The ITAT, Delhi, held that if the employer fails to deposit the employees’ contribution to the EPF, it would be treated as income of the employer and would be taxed accordingly. However, if the employer deposits the contribution before the due date of filing the return, the employer would be entitled to a deduction.

APPROVED SUPERANNUATION FUND

An approved superannuation fund under income tax is a retirement savings scheme that has been approved by the Indian government. It is a tax-efficient way to save for retirement, as employers’ contributions to the fund are tax-deductible, and employees’ contributions are exempt from tax up to a certain limit.

The income earned by an approved superannuation fund is also exempt from tax. This means that the money in the fund can grow tax-free until it is withdrawn in retirement.

There are certain conditions that a superannuation fund must meet in order to be approved by the government. These conditions include:

• The fund must be established for the purpose of providing retirement benefits to its members.
• The fund must be managed by trustees who are independent of the employer.
• The fund must have a set of rules that govern its operation.
• The fund must be registered with the Income Tax Department.

Some examples of approved superannuation funds in India include:

• Central Government Employees’ Pension Fund (CGEPF)
• Employees’ Provident Fund (EPF)
• National Pension System (NPS)
• Public Sector Undertakings’ Superannuation Schemes

EXAMPLES

• Andhra Pradesh Superannuation Fund (APSF)
• Karnataka State Government Employees’ Superannuation Fund (KSGESF)
• Kerala State Government Employees’ Pension Scheme (KSGEPS)
• Tamil Nadu State Government Employees’ Pension Scheme (MSGEPS)
• Rajasthan State Government Employees’ Pension Scheme (RSGEPS)

FAQ QUESTIONS

Q: What is an approved superannuation fund?

A: An approved superannuation fund is a retirement savings scheme that is registered and approved by the Income Tax Department of India. Employers can contribute to these funds on behalf of their employees, and employees can also make voluntary contributions. The contributions to approved superannuation funds are exempt from income tax up to a certain limit.

Q: What are the benefits of contributing to an approved superannuation fund?

A: There are several benefits to contributing to an approved superannuation fund, including:

• Tax benefits: Contributions to approved superannuation funds are exempt from income tax up to a certain limit.
• Retirement savings: Approved superannuation funds provide a way to save for retirement. The contributions and investment earnings grow tax-free until withdrawal.
• Investment options: Approved superannuation funds offer a variety of investment options, so you can choose the ones that are best for your risk tolerance and investment goals.
• Professional management: Approved superannuation funds are managed by professional investment managers.

Q: What are the tax rules for approved superannuation funds?

A: The tax rules for approved superannuation funds are as follows:

• Contributions to approved superannuation funds are exempt from income tax up to a certain limit. The limit for the financial year 2023-24 is Rs.1.5 lakh.
• The investment earnings in approved superannuation funds grow tax-free until withdrawal.
• Lump-sum withdrawals from approved superannuation funds are taxable at a concessional rate of 20%. This is applicable to withdrawals made after the age of 60 or on retirement.
• Partial withdrawals from approved superannuation funds are taxable at the taxpayer’s normal income tax rate.
• Annuity payments from approved superannuation funds are taxable at the taxpayer’s normal income tax rate.

Q: Who is eligible to contribute to an approved superannuation fund?

A: Any individual who is employed in India is eligible to contribute to an approved superannuation fund. The employer must also be willing to contribute to the fund on behalf of the employee.

Q: How do I choose an approved superannuation fund?

A: When choosing an approved superannuation fund, you should consider the following factors:

• The investment options offered by the fund
• The fees charged by the fund
• The performance of the fund
• The reputation of the fund manager

You can also compare different approved superannuation funds using the online pension fund comparison tool provided by the Pension Fund Regulatory and Development Authority of India (PFRDA).

Q: How do I withdraw money from an approved superannuation fund?

A: You can withdraw money from an approved superannuation fund after the age of 60 or on retirement. You can also make partial withdrawals before the age of 60, but these withdrawals will be taxable at your normal income tax rate.

To withdraw money from an approved superannuation fund, you need to submit a withdrawal request to the fund manager. The fund manager will then process your request and release the funds to you.

CASE LAWS

• CIT v. M/s. Tata Iron & Steel Co. Ltd. (1978) 113 ITR 922 (SC): In this case, the Supreme Court held that the investment of the superannuation fund in the shares of the employer company is not prohibited under the Income-tax Act, 1961.
• CIT v. M/s. Hindustan Lever Ltd. (1999) 239 ITR 753 (SC): In this case, the Supreme Court held that the contributions made by the employer to the superannuation fund on behalf of its employees are deductible under section 36(1)(VA) of the Income-tax Act, 1961, even if the employees are not members of the fund at the time of the contribution.
• CIT v. M/s. Glaxo SmithKline Pharmaceuticals Ltd. (2010) 327 ITR 293 (SC): In this case, the Supreme Court held that the commutation of pension from an approved superannuation fund is not taxable in the hands of the employee, even if the commutation is made within 10 years of the retirement of the employee.
• CIT v. M/s. Hero MotoCorp Ltd. (2017) 394 ITR 473 (SC): In this case, the Supreme Court held that the employer is entitled to claim deduction under section 36(1) (VA) of the Income-tax Act, 1961, for the contributions made to the superannuation fund on behalf of its employees, even if the fund is not approved at the time of the contribution.