Section 16(ii) of the Income-tax Act: Deduction Rules and Limits

Section 16(ii) of the Income-tax Act, 1961 provides a deduction for entertainment allowance received by eligible government employees under the old tax regime.

• The deduction is available to qualifying Central and State Government employees, not ordinary private-sector employees.
• The maximum annual deduction is Rs. 5,000.
• The allowable amount is the lowest of the actual entertainment allowance, 20% of qualifying salary or Rs. 5,000.
• Entertainment allowance is first included in taxable salary, even when a deduction is available.
• Section 16(ii) cannot be claimed under the new tax regime.
• For Assessment Year (AY) 2026–27, the provisions of the Income-tax Act, 1961 continue to apply.

Check your salary statement, Form 16 and selected tax regime before claiming the deduction. If you are also planning a home purchase, you can check your Bajaj Finance Home Loan eligibility to assess your financing options separately from your tax deductions.

Section 16(ii) of the Income-tax Act, 1961, allows eligible government employees to claim a limited deduction for entertainment allowance while calculating taxable salary. An entertainment allowance is an amount paid by an employer specifically to cover entertainment-related expenses as part of an employee’s remuneration.

The allowance is taxable when received. Eligible employees must include the full amount in their salary income before claiming the deduction permitted under Section 16(ii). This provision applies to income governed by the Income-tax Act, 1961, including income reported for Assessment Year (AY) 2026–27.

For example, if a government employee receives Rs. 12,000 as annual entertainment allowance, the entire amount forms part of salary income. However, the employee can claim a deduction of only up to Rs. 5,000, subject to the other statutory limits.

Source: Income Tax Department – Section 16.

Section 16(ii) of the Income-tax Act, 1961, allows eligible Central and State Government employees to claim a deduction for entertainment allowance received as part of their salary, subject to the prescribed limits. The deduction is not available simply because an employee incurs work-related entertainment expenses.

Last updated: 25th October 2026

Employment with a public-sector organisation does not automatically qualify as employment with the Central or State Government for this deduction.

The Income Tax Department’s AY 2026–27 return-validation material includes employment-category checks. However, eligibility ultimately depends on the applicable law and the employee’s legal employment status.

If you work for a public-sector undertaking or another government-linked organisation, verify your employment category before claiming the deduction.

Source: Income Tax Department – Deductions and allowances allowed to a salaried employee.

The deduction under Section 16(ii) is the lowest of three amounts: the actual entertainment allowance received, 20% of the qualifying salary or Rs. 5,000.

Section 16(ii) deduction = Lowest of the following three amounts

1. Actual entertainment allowance received during the financial year.
2. 20% of qualifying salary, excluding allowances, benefits and perquisites.
3. Rs. 5,000.

The Rs. 5,000 limit applies annually, not monthly.

Example: Calculating the entertainment allowance deduction
 

Consider Amit, a 35-year-old State Government employee in Jaipur. His annual basic salary is Rs. 4.80 lakh, and he receives an entertainment allowance of Rs. 18,000.

Amit can claim a deduction of Rs. 5,000 because it is the lowest of the three amounts. He must still include the full Rs. 18,000 allowance in his salary income before claiming the deduction.

The deduction reduces his taxable salary by Rs. 5,000; it does not reduce his tax payable by the same amount.

What if the allowance is below Rs. 5,000?
 

Suppose another eligible government employee receives Rs. 3,000 as entertainment allowance during the financial year. If 20% of the qualifying salary exceeds Rs. 3,000, the allowable deduction is Rs. 3,000.

The employee cannot claim the full Rs. 5,000 limit simply because it is the maximum permitted under the law. The deduction cannot exceed the actual allowance received.

Source: Income Tax Department – Various deductions under the Income-tax Act.

For Section 16(ii), calculate the 20% limit using the qualifying salary amount, excluding allowances, benefits, and perquisites. Therefore, you should not automatically use your gross salary or full cost-to-company (CTC) figure without checking its components.

Use the salary definition prescribed under the applicable law and check the salary details provided by your employer.

For example, an annual salary package of Rs. 8 lakh may include basic salary, allowances and other components. Using the entire amount to calculate 20% could overstate the relevant limit.

The Rs. 5,000 annual ceiling may still determine the final deduction in many cases, but you must calculate the qualifying salary correctly.

Yes. Entertainment allowance is taxable as salary, even when an eligible government employee can claim a deduction under Section 16(ii). The allowance must first be included in salary income, after which the eligible deduction can be applied.

Consider Amit, who receives Rs. 18,000 as entertainment allowance. The full amount is included in his salary income. If he meets the relevant conditions under the old tax regime, he can claim a deduction of Rs. 5,000.

The remaining Rs. 13,000 does not become exempt simply because Amit spends it on official entertainment.

Similarly, a private-sector employee receiving the same allowance cannot claim this deduction merely by submitting expense receipts. The purpose of an expense and eligibility for a salary deduction are separate matters.

No. The entertainment allowance deduction under Section 16(ii) is not available to taxpayers opting for the new tax regime for Assessment Year (AY) 2026–27. The new regime is the default, but eligible taxpayers may choose the old regime in accordance with the applicable filing rules.

The entertainment allowance deduction is relatively small, so you should not choose the old tax regime solely to claim Rs. 5,000. Instead, compare your total tax liability under both regimes, taking into account your income, standard deduction, applicable exemptions and other eligible deductions.

Source: Income Tax Department – Income from salary.

Section 16 of the Income-tax Act, 1961, provides separate deductions for standard deduction, entertainment allowance and professional tax. Each has its own eligibility conditions and calculation method.

The standard deduction does not require proof of an equivalent employment expense. The entertainment allowance deduction, however, depends on the allowance received, the employee’s eligibility, qualifying salary and the statutory limit.

Professional tax is a separate deduction under the old tax regime, subject to the applicable conditions.

You may claim multiple eligible salary deductions when permitted under your chosen tax regime, but you must satisfy the requirements of each provision separately.

Eligible government employees can claim the entertainment allowance deduction in the relevant salary section of their income-tax return, subject to the applicable conditions.

For AY 2026–27, the return is governed by the Income-tax Act, 1961.

Follow these steps:

1. Review your Form 16. Check the salary and entertainment allowance reported by your employer.
2. Confirm your eligibility. Ensure you qualify as a government employee for this deduction.
3. Choose the appropriate tax regime. Section 16(ii) allows this deduction only under the old tax regime.
4. Calculate the deduction. Compare the actual entertainment allowance received, 20% of qualifying salary and Rs. 5,000. The deduction is the lowest of these amounts.
5. Review the salary deductions section. Enter or confirm the eligible deduction in the relevant ITR fields.
6. Verify the calculation. Ensure the full entertainment allowance is included in salary income and only the allowable deduction is claimed.
7. Submit and verify your return. Complete the prescribed filing and verification process.

Do not reduce the salary reported by your employer by the deduction amount before calculating your taxable income.

Refer to the Income Tax Department’s official ITR instructions and validation rules to confirm the applicable fields and filing requirements.

Source: Income Tax Department, ITR e-Filing Portal.

You should retain documents showing your employment status, the allowance received and the salary used for the calculation.

Entertainment allowance is not treated as an unrestricted deduction for actual entertainment expenses. Therefore, spending Rs. 20,000 on official events does not automatically permit a Rs. 20,000 deduction. The deduction follows the statutory formula, even where actual expenditure is higher.

If you are uncertain whether your employer is covered by the provision, confirm your employment classification before filing.

The Income-tax Act, 2025 came into force on 1 April 2026 and reorganised the provisions governing income-tax computation.

For income earned during FY 2025–26 and reported in AY 2026–27, the Income-tax Act, 1961 continues to govern the return. The newer Act uses different section numbering for salary computation and deductions.

For an AY 2026–27 return, refer to Section 16(ii) rather than applying the new Act’s section numbering retrospectively. The return for Tax Year 2026–27 is a separate filing obligation.

Source: Income Tax Department, Income Tax Return FAQs.

Section 16(ii) affects your taxable salary calculation but does not directly determine how much you can borrow through a home loan. Lenders assess your income, repayment obligations, credit profile and other eligibility conditions.

For example, Amit earns Rs. 4.80 lakh in annual basic salary. His Rs. 5,000 entertainment allowance deduction reduces his taxable income under the old tax regime. However, this does not mean his lender will increase his eligible home loan amount by Rs. 5,000. The lender considers his actual earnings, existing financial commitments and ability to repay the equated monthly instalment (EMI).

If you are planning to buy a residential property, Bajaj Finance offers home loans of up to Rs. 15 crore*, subject to eligibility and property checks. You can check your Bajaj Finance Home Loan eligibility to understand your borrowing options based on your financial profile.

*Terms and conditions apply.

Start by confirming your employment category and the entertainment allowance included in your salary. Calculate the deduction using the lowest of the three statutory limits, then verify your selected tax regime and the relevant ITR fields.

If you are planning to buy a home, keep your salary slips, Form 16 and bank statements organised. These documents can also support the lender’s income assessment.

Before deciding on a borrowing amount, compare Bajaj Finance Home Loan interest rates and check your home loan eligibility.