Tax Talk: Spend three times of LTC allowance to get tax benefit

By Shailesh Kumar

Leave Travel Concession (LTC) has been a popular component of salary, both for employees in Central government and non-central government sectors. For private sector employees, LTC generally forms part of the CTC and is granted by employers to minimise income tax liability of employees.

This year due to the pandemic, most employees have not been able to travel and thus are not able to avail LTC benefit. In order to allow LTC benefit to these employees, and also with an objective of creation of demand in the economy ahead of the festive season, the government issued two circulars to allow benefit of LTC to central government as well as other employees, even if they don’t undertake any travel, subject to conditions mentioned in the circulars.

In case of Central government employees, the new scheme provides that cash equivalent of LTC, comprising leave encashment and LTC fare of the entitled LTC may be paid by way of reimbursement in the case of central government employees to be claimed within 31 March 2021. This shall be provided if an employee opts for this in lieu of one LTC for the block 2018-21 which shall be subject to various conditions as mentioned below:-

a) The employees need to exercise the option in the block year 2018-2021.
b) The employee is required to spend three times of the deemed cash allowance (deemed LTC fare per person) which is as follows:
i) Rs 36,000 for employees who are entitled to business class airfare
ii) Rs 20,000 for employees who are entitled to economy class airfare
iii) Rs 6,000 for employees who are entitled to rail fare of any class

c) The above-mentioned amount is to be spent on the goods bearing GST at the rate of 12% or more and such goods are required to be purchased from GST registered vendors/ service providers.
d) The purchase shall be through digital mode only and GST invoice has to be submitted by the employees.
e) The employee is required to spend a larger sum of money than the entitlement on account of LTC on actual expenditure.
f) Cash equivalent of full leave encashment shall be provided if an equivalent amount of sum is spent by the employee. This shall be counted towards the number of leave encashment on LTC available to an employee.
Further, TDS shall not be deducted on the reimbursement of the deemed LTC fare.

Non-central government employees
In case of non-central government employees, income tax exemption on LTC shall be granted if they spend three times of the amount of LTC on the goods/services bearing GST not less than 12% and such goods are required to be purchased from GST registered vendors/service providers. The maximum cash allowance/ LTC in this case shall be Rs 36,000 per person. The purchase shall be from October 12, 2020 to March 31, 2021.

In case the employee opts for the new tax regime under Section 115BAC then the exemption shall not be available. Therefore, the amount received will be taxed in the hands of the employees. Multiple bills for the purchase can be submitted, a simple application conveying the desire to avail the scheme can be made and the purchase can be made from e-commerce platforms, etc.

The writer is partner, Nangia & Co LLP. Inputs from Vaishali Dua, manager, Nangia & Co. LLP