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October 30, 2020

Private Sector Employees can now claim Tax Exemption for Leave Travel Concession Cash Voucher Scheme

by facelesscompliance in Income Tax

Private Sector Employees can now claim Tax Exemption for Leave Travel Concession Cash Voucher Scheme

Non-Central Govt employees eligible for Income Tax exemption under LTC cash voucher scheme

The Income Tax Department extended the exemption available under the LTC cash voucher scheme to employees of state governments, state-owned enterprises and private sector. The Income Tax Act, 1961 provides various exemptions to the salaried class. Such exemptions enable the employers to structure Cost to Company (CTC) of employees in a tax efficient manner. One of such exemptions available to salaried class under the law and also widely used by employers is the Leave Travel Concession (LTC).

What do you mean by LTC?

LTC is an exemption for allowance/assistance received by the employee from his employer for travelling on leave. The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee. No expenses such as local conveyance, sightseeing, hotel accommodation, food, etc., are eligible for this exemption. The exemption is also limited to LTA provided by the employer.

For instance, if LTA granted by employer is Rs 25,000 and actual eligible travel cost incurred by employee is Rs 15,000, exemption is available only to the extent of Rs 15,000 and balance Rs 10,000 would be included in taxable salary income.

Special cash package equivalent in lieu of LTC Fare for Central Government Employees during the Block 2018-21 provided in Ministry of Finance Notification dated 12th October, 2020

In view of Covid-19 pandemic and resultant nationwide lockdown as well as disruption of transport and hospitality sector, as also the need for observing social distancing, a number of Central Government employees were not in a position to avail themselves of LTC for travel to any place in India or their Hometowns in the current Block of 2018-21.

With a view to compensate and incentivise consumption by Central Government employees thereby giving a boost to consumption expenditure, it was decided that cash equivalent of LTC, comprising Leave Encashment and LTC fare of the entitled LTC to be paid by way of reimbursement, if an employee opts for this in lieu of one LTC in the Block of 2018-21.

What are the conditions to be fulfilled to avail the Special cash package equivalent in lieu of LTC Fare?

The following conditions should be fulfilled in order to avail the Special cash package equivalent in lieu of LTC Fare:

  • The employee should spend the money of a larger sum than the entitlement on account of LTC on actual expenditure
  • Cash equivalent of full leave encashment will be allowed, provided the employee spends an equal sum. This will be counted towards the number of leave encashment on LTC available to an employee
  • The cash equivalent may be allowed if the employee spends a sum 3 times of the value of the deemed LTC fare
  • The amount both on account of leave encashment and fare shall be admissible if the employee spends:
  • an amount equal to the value of leave encashment and;
  • an amount 3 times of the cash equivalent of deemed fare, as given above on purchase of such items / availing of such services which carry a GST rate of not less than 12% from GST registered vendors / service providers through digital mode and obtains a voucher indicating the GST number and the amount of GST paid.

What do you mean by deemed LTC fare?

The deemed LTC fare for this purpose is as give below:

Category of employeesDeemed LTC fare per person (Round Trip)
Employees who are entitled to business class of airfareRs. 36,000
Employees who are entitled to economy class of airfareRs. 20,000
Employees who are entitled to Rail fare of any classRs. 6,000

Can any amount of LTC fare be paid as advance?

  • An amount up to 100% of leave encashment and 50% of the value of deemed fare may be paid as advance into the bank account of the employee which shall be settled based on production of receipts towards purchase and availing of goods and services.
  • The claims under this package (with or without advance) are to be made and settled within the current financial year.
  • Non-utilization / under-utilization of advance is to be accounted for by the DDOs in accordance with the extant provisions relating to LTC advance i.e. immediate recovery of full advance in the case of non-utilisation and recovery of unutilized portion of the advance with penal interest.

LTC tax exemption now extended to non-central government employees

The Income Tax Department on 29th October, 2020 extended the Income Tax exemption available under the LTC cash voucher scheme to non-central governmentemployees. Non-central government employees include employees of state governments, public sector enterprises, banks and private sector.

How much LTC will be available to non-central government employees?

Payment of cash allowance, subject to maximum of Rs 36,000 per person as deemed Leave Travel Concession (LTC) fare per person (Round Trip) to non-central government employees, shall be allowed income-tax exemption subject to fulfilment of conditions.

What are the conditions to be fulfilled to avail the deemed LTC Fare by non-central government employees?

The income-tax exemption to receipt of deemed LTC fare by a non-Central Government employee shall be allowed subject to fulfilment of the following conditions:

  • The employee exercises an option for the deemed LTC fare in lieu of the applicable LTC in the Block year 2018-21.
  • The employee spends 3 times of the value of the deemed LTC fare on purchase of goods / services which carry a GST rate of not less than 12% from GST registered vendors / service providers through digital mode during the period from the 12th of October, 2020 to 31st of March, 2021 and obtains a voucher indicating the GST number and the amount of GST paid.
  • An employee who spends less than 3 times of the deemed LTC fare on specified expenditure during the specified period shall not be entitled to receive full amount of deemed LTC fare and the related income-tax exemption and the amount of both shall be reduced proportionately.

Let us refer to the below mentioned example to understand this better:

Deemed LTC Fare – Rs.20,000 x 4 = Rs. 80,000

Amount to be spent – Rs. 80,000 x 3 = Rs. 2,40,000

Thus, if an employee spends Rs. 2,40,000 or above on specified expenditure, he shall be entitled for full deemed LTC fare and the related income-tax exemption. However, if the employee spends Rs. 1,80,000 only, then he shall be entitled for 75% (i.e. Rs. 60,000) of deemed LTC fare and the related income-tax exemption. In case the employee already received Rs. 80,000 from employer in advance, he has to refund Rs. 20,000 to the employer as he could spend only 75% of the required amount.

Thus, this income tax benefit may actually be considered as discount on expenditure, which employee has already planned to incur, instead of a reason to incur expenditure. On the other hand, income tax foregone by the Government may be offset by the additional GST revenue on expenditure incurred by the employees.

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