Hi,
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). In order to allow individuals to claim LTA tax exemption and simultaneously boost GST (Goods and Service Tax) collection, the government announced a scheme on October 12, 2020, for Central government employees and on October 29, 2020, for all other employees. Under this scheme, LTA can be claimed by spending on the purchase of goods or services that attract GST.
Let's delve into how this scheme operates.
What is the tax provision for claiming a tax exemption for LTA?
Tax laws permit an exemption for any money received by an employee for traveling to any place within India, either alone or with eligible family members, for holidays, employment, or retirement. An employee can avail the tax benefit of LTA for two journeys during a block period of 4 calendar years. The current block is 2018-2021. Unutilized LTA can be carried forward to the first journey in the following block. It is not mandatory to split the LTA benefit into two parts; it can be fully utilized in one journey within the block.
How can an employee claim LTA even without traveling?
Under the announced scheme, Central government employees can opt for cash in lieu of their leave and LTA entitlements, while other employees can only claim LTA, subject to specific conditions.
To claim cash in lieu of leave entitlement, one must spend an amount equal to the leave entitlement on purchasing goods or services. For claiming LTA exemption, both categories of employees need to spend at least three times the value of their LTA entitlement. To avail both benefits, goods and services must be purchased from a GST-registered seller with GST of 12% or higher. Payment must be made digitally; cash or cheque payments are not eligible for the benefit. Additionally, the original tax paid invoice must be submitted to the employer. If the full amount is not spent, the benefit will be provided proportionately.
If LTA is part of an employee's salary, the employer will pay the unclaimed LTA, treating it as a taxable element after deducting tax at the individual's slab rate.
Who is eligible to claim this benefit?
This alternative benefit is accessible only to employees entitled to LTA. While employees can choose between the old scheme and the new scheme with lower tax rates while filing their ITR, opting for the new scheme renders them ineligible for this benefit unless their employer allows them to revert their choice.
Should employees opt for this benefit?
Given the requirement to spend three times the LTA value on goods or services attracting a minimum 12% GST, individuals would effectively pay at least 36% of the LTA value as GST to save tax on the LTA entitlement. Tax rates can range from 5.20% to 42.74%. Considering the 36% payment to save tax, individuals need to assess whether the benefit outweighs the cost, especially if they are entitled to cash in lieu of LTA benefits. Both categories of employees have a fare limit of Rs. 36,000 per person.
For instance, if a family has four members, the maximum LTA exemption would be Rs. 1,44,000 (36,000 * 4). To claim an exemption for this amount, they must spend three times this amount, i.e., Rs. 4,32,000, on goods or services with at least 12% GST. This entails a minimum out-of-pocket payment of Rs. 51,840 as GST. Individuals should compare the income tax saving against the GST outflow to determine the net benefit.
The current block of four years will end on December 31, 2021, with the possibility of Covid-19 severity diminishing by then, allowing for travel. Unclaimed LTA can be carried forward for one journey in the next block until December 31, 2022. Even if it remains unclaimed in the current block, it can be carried forward to the first journey in the next block of 2023-2026.
This option is advantageous for those planning to purchase eligible goods/services, as the income tax saving will essentially serve as a discount on the product/service.
In conclusion, it is advisable not to rush to avail this benefit unless there is a genuine need to purchase goods or services eligible for this substitution.
Thank you.
From India, Gurgaon
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49Due 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). In order to allow individuals to claim LTA tax exemption and simultaneously boost GST (Goods and Service Tax) collection, the government announced a scheme on October 12, 2020, for Central government employees and on October 29, 2020, for all other employees. Under this scheme, LTA can be claimed by spending on the purchase of goods or services that attract GST.
Let's delve into how this scheme operates.
What is the tax provision for claiming a tax exemption for LTA?
Tax laws permit an exemption for any money received by an employee for traveling to any place within India, either alone or with eligible family members, for holidays, employment, or retirement. An employee can avail the tax benefit of LTA for two journeys during a block period of 4 calendar years. The current block is 2018-2021. Unutilized LTA can be carried forward to the first journey in the following block. It is not mandatory to split the LTA benefit into two parts; it can be fully utilized in one journey within the block.
How can an employee claim LTA even without traveling?
Under the announced scheme, Central government employees can opt for cash in lieu of their leave and LTA entitlements, while other employees can only claim LTA, subject to specific conditions.
To claim cash in lieu of leave entitlement, one must spend an amount equal to the leave entitlement on purchasing goods or services. For claiming LTA exemption, both categories of employees need to spend at least three times the value of their LTA entitlement. To avail both benefits, goods and services must be purchased from a GST-registered seller with GST of 12% or higher. Payment must be made digitally; cash or cheque payments are not eligible for the benefit. Additionally, the original tax paid invoice must be submitted to the employer. If the full amount is not spent, the benefit will be provided proportionately.
If LTA is part of an employee's salary, the employer will pay the unclaimed LTA, treating it as a taxable element after deducting tax at the individual's slab rate.
Who is eligible to claim this benefit?
This alternative benefit is accessible only to employees entitled to LTA. While employees can choose between the old scheme and the new scheme with lower tax rates while filing their ITR, opting for the new scheme renders them ineligible for this benefit unless their employer allows them to revert their choice.
Should employees opt for this benefit?
Given the requirement to spend three times the LTA value on goods or services attracting a minimum 12% GST, individuals would effectively pay at least 36% of the LTA value as GST to save tax on the LTA entitlement. Tax rates can range from 5.20% to 42.74%. Considering the 36% payment to save tax, individuals need to assess whether the benefit outweighs the cost, especially if they are entitled to cash in lieu of LTA benefits. Both categories of employees have a fare limit of Rs. 36,000 per person.
For instance, if a family has four members, the maximum LTA exemption would be Rs. 1,44,000 (36,000 * 4). To claim an exemption for this amount, they must spend three times this amount, i.e., Rs. 4,32,000, on goods or services with at least 12% GST. This entails a minimum out-of-pocket payment of Rs. 51,840 as GST. Individuals should compare the income tax saving against the GST outflow to determine the net benefit.
The current block of four years will end on December 31, 2021, with the possibility of Covid-19 severity diminishing by then, allowing for travel. Unclaimed LTA can be carried forward for one journey in the next block until December 31, 2022. Even if it remains unclaimed in the current block, it can be carried forward to the first journey in the next block of 2023-2026.
This option is advantageous for those planning to purchase eligible goods/services, as the income tax saving will essentially serve as a discount on the product/service.
In conclusion, it is advisable not to rush to avail this benefit unless there is a genuine need to purchase goods or services eligible for this substitution.
Thank you.
From India, Gurgaon
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Note on HRA & LTA Exemption.doc