No LTC cash scheme under the new income tax regime
Leave Travel Concession (LTC) is a prerequisite given to employees as a part of their total CTC (the cost to company) for travelling anywhere in India when on leave for self and family members. The family includes spouse, children (two), dependent parents and dependent siblings. Employees can claim tax exemption under section 10 (5) of the Income Tax Act, 1961 for these perquisites. Depending on the pay scale, Central Government employees get the LTC prerequisite in a block of four years
However, due to Covid-19 pandemic employees are not in a position to utilise their LTC benefit for travel purposes as there are many restrictions right from nationwide lockdown and need for social distancing to disruption in hospitality services and transportation services. Keeping this in view, the Government of India has announced the biggest incentive to the employees to avail the LTC Cash Voucher Scheme in order to boost the consumption expenditure.
What is the LTC Cash Voucher Scheme all about?
LTC Cash Voucher Scheme allows employees to avail the tax-free payouts of the leave travel allowance meant for the holiday travel without having to travel considering the pandemic situation. LTC Cash Voucher Scheme benefit can be availed by the employees of Central Government, State Government, Banks, Public Sector Undertakings and Private Sector Enterprises.
However, to avail this benefit without having to take a trip, employees availing the benefit should spend three times the allowance payout on purchase of goods and services that are taxable (GST) at the rate of 12% or more. Eligible employees who would like to avail the benefit have to make a purchase of goods and services from GST registered suppliers via online mode within 31st March 2021. For example, if the deemed LTC fare is INR 60,000 (15,000 X 4 members of the family), then the employee availing benefit under LTC Cash Voucher Scheme needs to spend INR 1,80,000 (3 times the fare) to avail the full LTC benefits and related tax-exemption. The benefit under this scheme is applicable for the current LTC block of 2018-21. Eligible central government employees are also required to make the purchase to avail the tax exemption benefit. LTC cash allowance payout is capped at INR 36,000 per person.
It is also important to note that if the employee spends less than three times the allowance amount on the purchase, then the LTC cash allowance and the tax exemption will be reduced proportionately. For example, Employees can get the LTC advance (up to 50% of the travel fare and up to 100% of leave encashment). In the case of non-utilisation of the advance, the employee needs to refund the unutilised portion to the employer. It is also important to furnish the invoice for the spending. The purchase invoice must include GST number of the supplier and the amount of GST paid. The invoice needs to be submitted before the end of the financial year i.e. before 31st March 2021. For example, if deemed LTC fare is INR 60,000, and the employee spends only INR 1,35,000, then that employee will be entitled to 75% (i.e. INR 45,000) of deemed LTC fare and the related tax exemption. In case, the employee has availed the allowance of INR 60,000 in advance, he/she needs to refund the unutilised portion i.e. INR 15,000 (60,000 – 45,000) to the employer.
Tax exemptions on LTC Cash Voucher Scheme benefits
As per the guidelines of the LTC cash voucher scheme (for central government employees), the maximum amount of cash allowance (as deemed LTC fare) a person can claim is INR 36,000. Which means if an employee with three other family members can claim cash allowance of maximum INR. 1, 44,000. To make this claim, he needs to spend a total of INR 4,32,000 on purchase of certain products and services that are taxed (GST) at 12% and above ( products such as refrigerators, cars, mobiles and laptops etc). And, only digital transactions are allowed. By spending INR 4,32,000, he can avail the maximum tax benefit of INR 43,200. If the spending is less, then the tax exemption is also provided proportionately.
However, the Finance Minister later made an announcement that the tax exemptions on benefits availed under LTC cash voucher scheme is not available for employees who have opted to pay tax as per the new income tax regime introduced in the current financial year. If an employee has opted to pay income tax under the concessional tax regime under section 115BAC of the Income Tax Act, 1961 where he pays a lower tax levy by forgoing all the exemptions including the tax exemptions on LTC benefit.
It is important to note for all the individuals who are opting to pay income tax under the new concessional income tax regime that they will need to forgo almost all the tax exemptions that they were claiming in the previous tax structure as the new tax regime has reduced tax rates. Some of the exemptions that are mainly listed are left travel allowance exemptions, deductions under Section 80TTA or 80TTB and house rent allowance exemptions etc. However, individuals have the choice to opt for the old tax regime to avail all the tax exemptions including leave travel allowance exemption.
To sum up, the recently introduced LTC cash voucher scheme by the Government of India is a part of a stimulus package to incentivise the employee consumption amid Covid-19 crisis. Under this scheme, the government has decided to make a cash payment in lieu of one LTC during the block of 2018-21. Employees who are planning to opt for the previous or old tax regime in the financial year 2020-21 can avail the tax exemption benefits under LTC cash voucher scheme. Instead of providing proof of travel, the employee has to furnish the invoice for purchasing the goods and services. However, if an individual is opting to be taxed under the new tax regime prescribed under Section 115BAC of the Income Tax Act, 1961, he or she cannot avail the tax exemption for benefits under LTC cash voucher scheme.