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February 3, 2021

Two changes for salaried in Budget 2021

by CA Shivam Jaiswal in Budget

Two changes for salaried in Budget 2021

Finance Minister Nirmala Sitharaman proposed many new measures in the Budget 2021 to prop up the declining economy amid the Covid-19 pandemic and boost spending across sectors. Budget 2021 focused on the seven pillars for reviving the economy – Health and Wellbeing, Physical and Financial Capital and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D, and Minimum Government Maximum Governance. Several direct taxes and indirect taxes amendments were also proposed.

Salaried employees form the major chunk of the overall taxpayers in the country and the contribution they make to the tax collection is quite significant. Income tax deductions offer a gamut of opportunities for saving tax for the salaried class. With the help of these deductions and exemptions and, one could reduce his/her tax substantially.

1. Exemption for cash allowance received in lieu of LTC

Leave Travel Concession/Allowance (LTC/LTA) 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.

However, due to the COVID-19 pandemic and the nationwide lockdown, employees have not been able to avail of Leave Travel Concession (LTC) in the current block of 2018-21. Thus, to provide relief to such employees, the said section has been proposed to be amended to provide an exemption in respect of cash allowance received in lieu of leave travel concession (LTC).

What conditions will one be required to be fulfilled to avail this exemption?

To claim the benefit under the scheme, an individual is required to fulfil the following conditions:

  • Spend three times the amount of deemed LTC fare on the purchase of goods/services attracting GST of 12% or more;
  • Purchases must be made during the period between October 12, 2020 and March 31, 2021.
  • Payment for the purchases must be made through a digital mode including cheque, UPI, etc.
  • Invoices must be furnished to an employer containing details of the vendor, GST number and GST amount paid. Invoices in the name of family members can also be submitted.

A private sector employee can claim maximum tax exemption of Rs 36,000 per person. Thus, a family of four can claim tax exemption of Rs 1.44 lakh.

2.Taxability of Interest on Provident Fund

A provident fund is a retirement fund run by the government. They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount. If a participant dies, his or her surviving spouse and dependents may be able to continue drawing payments.

Statutory Provident Fund or General Provident Fund is maintained by Government and Semi-Government organizations. The Government employee contributes a certain amount of salary to this fund. The accumulations in this fund are paid to the Government employee at the time of retirement or superannuation.

Every Government employee can have this account but the GPF is not available to the private sector employees. This fund can be used to draw advances known as GPF advances which are interest-free and are to be repaid in monthly instalments. There is no bar on the number of GPF advances. This fund matures at retirement or superannuation.

Before the Proposed Budget 2021, the below mentioned tax exemptions were available for Statutory Provident Fund:

  • Employer’s contribution to provident fund
  • Interest credited to provident fund
  • Lump-sum payment at the time of retirement or termination of service.

In Budget 2021, it has been proposed that the exemption shall not be available for the interest income accrued during the previous year on the recognised and statutory provident fund in the account of the person to the extent it relates to the contribution made by the employees in excess of Rs. 2,50,000 in a previous year.

These amendments will take effect from 1st July, 2021.

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