Under the scheme announced, the Central government employees are allowed to get cash in lieu of their entitlement for leave and LTA both whereas other employees can claim LTA only, on satisfaction of certain conditions.
Due to the Covid-19 pandemic, many people are not in a position to travel with family and, therefore, are unable to claim Leave Travel Allowance (LTA). With a view to let such persons claim LTA tax exemption and at the same time give a boost to GST (Goods and Service Tax) collection, the government announced a scheme on the 12th October 2020 for the Central government employees and, on the 29th October 2020 for all other employees, under which LTA can be claimed if you spend on the purchase of goods or services attracting GST.
What is tax provision for claiming tax exemption for LTA?
The tax laws allow exemption for any money received by an employee for travelling to any place within India, either himself alone or along with his eligible family members, on holidays or otherwise or during employment or on retirement. An employee can avail tax benefit of LTA for two journeys during a predefined block period of 4 calendar years. The current block is of 2018-2021. You are allowed to carry forward unveiled LTA to the first journey to be undertaken in the following block. It is not necessary for you to avail the LTA benefit in two parts. You can exhaust it in one journey in the block.
What is the extent of tax relief I can expect?
The maximum fare eligible for the purpose is Rs 36,000 per family member, in line with the structure applicable to the highest slab for central government and public sector employees, whose entitlement is decided by their grade. “However, your LTA limit will also come into play. Therefore, if your LTA is Rs 40,000 per annum, you will have to spend Rs 1.2 lakh to exhaust the tax benefit. Also, if LTA is not part of your salary structure, you will not be able to claim the benefit under this scheme.
What if I am unable to utilize the entire LTA?
In that case, the tax benefit will be allowed in proportion of the amount you spend. “The eligible benefit amount will be restricted to one-third of the amount spent and the balance will be subject to tax as per the slab rate applicable to you. For example, if you are entitled to LTA of Rs 80,000 (deemed LTC fare), you will have to spend Rs 2.4 lakh (Rs 80,000 x 3) to get the full exemption. However, if you manage to make purchases worth only Rs 1.8 lakh, the amount eligible for the benefit will be restricted to Rs 60,000 – that is, one-third of the amount actually spent (Rs 1.8 lakh) or 75 percent of your deemed LTC fare (that is, Rs 80,000). Assuming you fall in the highest tax bracket (30 percent), the tax applicable on this Rs 60,000 would have been Rs 18,000 had you not availed of the scheme. Since you have, you will save on this outgo.
Who can claim this benefit?
This substitutive benefit is available only to those employees who are entitled to LTA. Though you are entitled to opt for the old scheme or the new scheme of taxation with lower rates while filing your ITR, but if you have opted for the new scheme of taxation, you will not be able to claim this benefit unless your employer lets you revere your option.
Should you go for it?
Since spending on purchase of goods or services of three times in value with a minimum 12% of GST, you will effectively pay at least 36% of the value of LTA exemption as GST for saving tax payable on your LTA entitlement. Your tax rates may vary between 5.20% and 42.74%. So, think whether it is worth it to pay 36% just to save the tax applicable for you in case you are entitlement to get cash in lieu of LTA benefits. For both categories of employees, there is a limit of fare of Rs 36,000 per person. Let us understand this with an example. In case you have four members in your family, the maximum LTA exempt in your hands would be Rs 1,44,000 (36,000*4). For claiming exemption for this amount of eligible LTA, you will have to spend 3 times of this amount i.e. 4,32,000 for buying goods or services attracting minimum of 12% GST. So, you will have to pay minimum Rs 51,840 out of your pocket as GST. Just compare the income tax saving which will accrue to you against the GST outgo in case you opt for it.
Conclusion.
The current block of four years will expire next year on 31st December 2021, i.e. one year away, by which time, in all probability the severity of Covid-19 may subside and you may in fact be able to travel. As explained, you are allowed to carry forward the unclaimed LTA to one journey in the next block, you still have time to claim it till 31st December 2022. Even if you are not able to claim it during the current block, you can carry forward the unclaimed LTA but to be claimed in the first journey in the next block of 2023-2026.
This option works well for those who have anyway been planning to buy such eligible goods or services as for them the amount of income tax saving will work as discount on the product/service to be bought.