Authored by Alok Agrawal and Dhananjay Kumar
After the earlier announcements on economic packages, the Union Minister for Finance and Corporate Affairs, Nirmala Sitharaman has announced yet another package to stimulate consumer demand, ahead of the upcoming festive season.
Before we discuss details of the announcement, let us understand the existing rules for claiming an income tax exemption for Leave Travel Assistance (LTA) or Leave Travel Concession under the tax law.
Employees who are eligible for LTA as part of their salary structure can claim LTA exemption for the actual travel costs incurred by them for domestic travel while on leave. LTA exemption is available for 2 journeys in a block of 4 years (the current block is from the calendar year 2018 to 2021).
Employees also have the option to carry over such exemption with respect to one journey to the next block, provided they avail of this benefit during the first calendar year of the new block.
As a result of the current pandemic and the travel restrictions currently in place, it has been difficult for most employees to travel during the current year. Hence, employees who have not claimed any tax benefits for LTA during the current block may find it difficult to claim the entire benefit i.e. for 2 journeys during the current block (by December 2021).
Leave Travel Concession (LTC) Voucher Scheme
As per the scheme, Central Government employees can avail of cash voucher for LTC if the same is not availed during the current block (2018-2021) ending in December 2021. Cash voucher for one trip can be availed under this scheme. Employees opting for the scheme are required to buy goods or services worth three times of LTC entitlement on or before 31 March 2021, having a GST rate of 12 percent or more, from a GST registered vendor, with payment for the same being made through a digital mode.
The scheme also provides that in case the Central Government employee spends a lower amount, the total amount payable would be proportionately reduced, based on the illustration provided in the memorandum issued by the finance ministry.
How will these measures benefit private-sector employees?
In the private sector, the employees’ salary structure is generally based on the cost-to-company (CTC) concept and employees can opt for the leave travel allowance up to certain limits as per the company policy as part of their salary package.
While the memorandum issued by the authorities talks specifically about Central Government employees, it has been announced that a similar benefit will also be available to private-sector employees.
Further, the government has notified deemed LTC fare per person for the Central Government employees, based on their grades/categories. However, as mentioned above, as LTA forms part of the private sector employees’ CTC/salary structure, it is generally limited to a lumpsum amount as per their employment contracts.
Hence, to avail the benefits under this scheme, whether the same deemed LTC fare as notified for the Central Government employees, will be applicable for the private sector employees as well, or a different rate/methodology will be notified specifically for private-sector employees, is yet to be clarified by the tax authorities.
Given the travel restrictions during the current year, some employees may have already received the cash allowance (equivalent to their LTA) from the employer after deduction of taxes. Depending upon the final tax rules once they are notified, we will need to evaluate whether such employees will be able to take advantage of this tax exemption.
Can employees who have opted for the new concession regime benefit from this?
As per the new tax regime introduced in the 2020 Budget, employees who have opted for the new tax regime with lower tax rates are required to forego various exemptions/deductions, including the leave travel allowance exemption; the tax benefits for LTC are not available for the employees opting for the new tax regime. Accordingly, benefits as per the LTC scheme may not be available for employees opting for the new tax regime. However, clarity from the tax authorities is expected once the relevant notification from the Income-tax department is issued.
In summary, using income tax incentives to boost consumer spending is a good move by the Government under the current economic environment.
However, the effectiveness of this for the private sector employees will depend upon the details which are yet to be announced.
Alok Agrawal is Partner, Deloitte India and Dhananjay Kumar - Deputy Manager with Deloitte Haskins and Sells LLP