Covid – 19 pandemic has resulted in huge disruption of transport and hospitality sector. Due to this, employees are not able to avail Leave Travel Allowance (LTA) benefit provided by employers. LTA benefit entitles an employee to avail tax exemption in respect of travel costs incurred by an employee for himself and his family to any destination within India. The exemption is available in respect of two travels made in a prescribed block of four calendar years (currently 2018-21). In order to incentivise employees and also boost the consumption, the government has come up with LTA cash voucher benefit.
As per the same, an employee is entitled to a cash allowance of Rs.36,000 per person. So, in case of a married person having two kids, the maximum amount of Leave Travel Allowance cash benefit would be Rs.1,44,000 (36000*4) i.e., for himself, spouse and two kids. Since, this is the maximum amount, if the employee is entitled to only Rs.1,20,000 as LTA in his salary package, the benefit would be restricted to such amount. Such LTA benefit would be exempt from taxation if the following conditions are fulfilled –
- Leave Travel Allowance (LTA) should be forming part of the salary structure.
- Employee should not have availed LTA exemption with respect to both the travels made during the current block period.
- Employee spends 3 times the value of LTA cash allowance on goods and services which are subject to GST at the rate of 12% or more
- The above spending should be during the period from 12 Oct 20 to 31 Mar 21
- The payment for such purchases must happen in digital mode. The purchases made by cash payment will not be eligible for this benefit.
- The employee must obtain an invoice indicating the GST number and the amount of GST paid.
- Invoice should be in the name of the employee.
Points to note
- Employees opting for simplified tax regime are not eligible to avail LTA cash benefit.
- It is optional for the employee to choose between cash benefit and the normal Leave Travel Allowance.
- Though 31st March 2021 has been specified as the last date for spending, tax proof submissions in most of the corporates may happen in Jan/Feb. So, employees would need to plan their spending accordingly.
- If an employee spends less than 3 times of the LTA cash allowance, the income tax exemption would be proportionately reduced.
Here is an example of tax savings in case of an employee who is married and having two kids.
|(A) Maximum cash benefit (36,000*4)||1,44,000|
|(B) LTA as per his salary package||1,20,000|
|(C)Cash benefit entitlement – Lower of (A) and (B)||1,20,000|
|(D) Amount to be spent to avail full exemption – (C)*3||3,60,000|
|(E) Tax savings assuming 30% tax slab with no surcharge||37,440|
Suppose if the employee spends only Rs.1,80,000 his benefit would be proportionately reduced as shown below.
|(F) Amount spent||1,80,000|
|(G) Exemption – (C)*1,80,000/3,60,000||60,000|
|(H) Tax savings||18,720|
If you observe the above example closely, the tax saving is coming to just above 10% of the total amount spent. That means, in order to save 10% of taxes, one need to spend 3 times the benefit provided which may not be practical in many cases, especially during these difficult times. Hence, employees need to be cautious before making this choice and exercise their prudential judgement.
Another benefit provided under the normal Leave Travel Allowance(LTA) rules is that, if an employee is unable to claim the exemption with respect to one or more travels in a block of four years, he may carry forward one such journey to the next block. However, such carry forward LTA exemption needs to be utilised in the first year of the subsequent block. For example, if an employee has availed LTA exemption only once in the current block of 2018-2021, he can avail exemption with respect to the travel undertaken in the first year of the subsequent block i.e., 2022. He can further claim exemption in respect of two more journeys between the years 2023 and 2025. Employees whoever is eligible could explore the option of carrying over the Leave Travel Allowance(LTA) benefit instead of spending thrice the amount of cash benefit.