Understanding LTA: Can Employees Claim Last Year's Nontaxable LTA in a Taxable Year?

Dear Seniors, I searched on Cite but could not find anything related to my query. Briefly about our company policy: We follow the same block of 4 years, where 1 and 3 are taxable (where bills are required and if not provided, then total taxable) and 2 and 4 are nontaxable (where no bills are required).

Question 1: Monthly LTA Payment

Employees want to make yearly entitled LTA pay on a monthly basis (Annual LTA/12). Can we do this or not? If yes, then in case any employee produces the actual bill for travel during the calendar year, they will get tax benefits on the produced bills, and else it will be taxable. For example, if the yearly entitlement is 10,000 and the employee produced tickets for 5,000, then 5,000 will be taxable, and 5,000 will be nontaxable.

Question 2: LTA Claim in Taxable Year

In case the employee did not claim LTA in the nontaxable year and claims LTA in the next taxable year without bills, will the total accumulated amount be liable for tax, or will the previous year's nontaxable amount be exempted?

The Income Tax Act considers availing of LTA/LTC amount exempted every alternate year. It seems that your company policy is formulated in line with it. When your company policy is clear about the taxability of LTA payment in the first and third years, there should not be any confusion regarding the production of bills. The employee is entitled to tax exemption for the amount spent on LTA only based on bills.

Secondly, is the employer ready to pay LTA on a monthly basis from a cash flow point of view? If YES, the taxability provision stands. It is clear that if the employee does not avail LTA in one year, he loses the entitlement along with the tax benefit in sync with the IT Act.

Kind regards

Dear Seniors,

Q1: Employees want to make yearly entitled LTA pay on a monthly basis (Annual LTA/12). Can we do this or not? If yes, then in case any employee produces the actual bill for travel during the calendar year, they will get a tax benefit on the produced bills; otherwise, it will be taxable. For example, if the yearly entitlement is 10,000 and the employee produces tickets for 5,000, then 5,000 will be taxable, and 5,000 will be non-taxable.

Ans: As per the IT Act for LTA payment/reimbursement, travel cannot be pre-assumed, so it cannot be paid monthly before travel. If done so, it would be taxable. Once the provision is made for 2 times in a block year, then it has to be 2 times in block years for tax exemption purposes; otherwise, with a taxable burden, the LTA component can be paid out monthly.

Q2: In case an employee did not claim LTA in a non-taxable year and claims LTA in the next taxable year without bills, will the total accumulated amount be liable for tax, or will the previous year's non-taxable amount be exempted?

Ans: There is no question of a taxable year or only for 2 times. An employee is eligible to get the reimbursement tax-free.

Thank you.

Request for Suggestions on LTC Salary Structure

Your suggestion is required in LTC.

Case Overview:

We are planning to change the salary structure in our company. As per the recent salary structure, the LTC amount is mentioned as 1 month's basic salary. Since this is a component where employees can save tax, considering the tax-saving point of view, we have given the option to employees that they can make the LTC amount up to a maximum of 2 months' basic.

As per our current practice, we are considering the calendar year (Jan ~ Dec) for LTC and paying the LTC amount along with the March salary based on the last December salary paid. In other words, salary increments are being done from 1st April.

For example, LTC paid in March 2013 for the period of Jan'12 to Dec'12. But as per the salary increment, the salary changed in April'12, and the employee got paid as per the April'12 basic for the whole year.

Is this the right practice? I feel it is not.

My Suggestion:

If our observation period is Jan to Dec and the increment is being done from April, the LTC amount should be paid as below:

LTC component from Jan'12 to Mar'12 was 10000, and with the April'12 increment, it changed to 14000. So it should be (10000/12*3 + 14000/12*9).

I need your suggestion. Please advise me on the same.

Since we are planning to revise the salary structure from October and the option given to employees for opting for a maximum of up to 2 times the basic as LTC component, in this case, if we follow our current practice of the last December salary paid, the company will incur a loss.

My suggestion is: (10000/12*3 + 14000/12*6 + 28000/12*3) if we are changing the structure from October.

As suggested by my ex-HR manager, we pay as per the last December salary paid only.

I need your expert advice on the same along with an artifact. Because we are a Korean-based MNC, here everything is based on actual artifacts.

I will be highly obliged for the same. Or better if we can talk on this issue on the phone.

Regards,

Kunal Kumar

Dear Kunal, I feel your calculations are correct, for which you relied basically on the actual payment of salary for the period covered, i.e., salary drawn from the months of January to December but paid in March-April next year.

However, I feel your payment on a lump sum basis on any calculation towards LTC without the production of any proof of travel is not in sync with the provisions of the Income Tax Act. The Income Tax Act provides an exemption for the actual amount spent on travel based on the production of tickets/receipts. The excess amount paid or the total amount in case of non-utilization is taxable. Please check with your tax consultants to arrive at the methodology of payment to employees so that they get exemptions under the IT Act.

Regards

Thanks for all your suggestions. I am linking one more query to the same.

Query on Leave Travel Concession (LTC) Claims

Can an employer take claims of LTC without any supporting documents? Without any supporting documents means: no travel ticket, just getting one company-prescribed format filled by employees - no other documents to support the same.

As per me, no. In case of no, what are all the consequences? And if Income Tax catches the same, who will be responsible: the employer or the employee? I feel both, but the employer is more liable because they are providing Form-16 to the employee.

Need expert advice for the same.

Regards

Employer Obligation for Leave Travel Allowance (LTA) Tax Exemption

Many employers are under the impression that they do not need to collect proof of leave travel. However, in the TDS circular issued recently, the Income Tax Department has specified that employers need to collect and scrutinize the proof of travel (e.g., tickets) before granting tax exemption.

The relevant excerpt from the Income Tax Department TDS circular (for 2013-14) is as follows:

"Obligation of the employer – The employer has to satisfy the obligation that leave travel (fare) concession is not taxable in view of section 10(5). The employer is not only required to be satisfied about the provisions of the said clause but also to keep and preserve evidence in support thereof."

All employers should collect proof of travel from employees if they wish to grant tax exemption on LTA. If an employer does not collect travel proof, the organization will be deemed to have not adhered to the TDS rules, and the department can initiate action accordingly.

Please take a look at our blog post for more information on LTA tax exemption: Tax Exemption on Leave Travel Allowance (LTA) - Part I « Hinote Systems - Outsourced Payroll Services & Online Payroll Software