Understanding LTA in Salary: Can It Be Monthly and More Employee-Friendly?

I want to know that can we add LTA into monthly salary breakup. In our company they have divided salary into Basic, HRA, Conveyance, Medical, LTA and Special is it correct because as per income tax rule we can claim LTA only twice in 4 year's. Other wise can we remove LTA and put the LTA amount into special or is there any component which is more favourable to employee?

Dear SM11,

In general practice, LTA is paid once a year. As you rightly pointed out, LTA is exempt from tax if it is claimed twice in a block of 4 years. If you intend to pay this on a monthly basis, then the purpose of giving exemption is lost. So, as you have pointed out, it will be beneficial for employees if it is given to them under a different earning head which will be exempt from tax.

For example, you can consider setting up a superannuation scheme for your employees wherein 15% of the employee's basic salary is deposited with LIC OF INDIA. This amount accrues in the employee's account and gets paid as per rules and regulations framed by your company. This is not taxable at the hands of the employee, and the employer is also exempt to the extent of the contribution to the superannuation fund. The employee gets a monthly pension upon his attaining superannuation or resigning from employment (if such a clause is permitted by the employer).

Regards,
M.V. KANNAN

Thank you for your prompt response. However, in our company, the management is not prepared for superannuation fund contributions. They only wish to remove the LTA option and create another category for salary components. I am awaiting your response.

Thanks and Regards,
Sheela

Dear Sheela,

If you are providing a medical allowance, you can allow your employee to claim up to Rs. 15,000 annually by submitting medical bills for reimbursement of medical expenses, which is exempt from tax.

Similarly, some companies offer food vouchers (such as Sodexo passes) that are also tax-exempt. However, it was recently pointed out by a member on citehr that these vouchers, typically used at department stores for grocery purchases, may not be tax-exempt. Therefore, it is important to verify this before proceeding.

You may want to consider implementing a flexible allowance package, where the CTC component is fixed, and employees can choose the earning head of their preference to maximize exemptions allowed under the Income Tax Act. This suggestion takes into account that each employee has a unique savings pattern. Employees can seek advice from their auditors to make an informed choice, but the responsibility of verifying the information provided by the employee still lies with you as the tax deducting authority.

If you have any further queries, please do not hesitate to reach out.

M.V.KANNAN