This year, the month of December is quite unique. It’s usually the time when employers start asking employees for investment proofs. These proofs reduce income tax payable by you for the current financial year (2020-21). Oddly, because of the pandemic, this month is now also the time when people are frantically figuring out how to file their income tax returns for the previous financial year (2019-20). So, today, I want to talk to you about one tiny section of the Income Tax Act, that could impact your taxes for both these years – Leave Travel Allowance under section 10(5) of the Act, and what the new Leave Travel benefit is all about.
Not all companies offer this allowance to their employees, but take one look at your pay slip, or Form 16, and you’ll know whether you receive this allowance or not. If LTA is a part of your salary structure, you are eligible to claim certain expenses and lower your taxable income, thereby lowering the income tax you pay.
What expenses can be claimed?
The exemption is available only on the actual travel costs i.e., the air, rail or bus fare you incur. No exemption is available for expenditure on local transport, sightseeing, hotel accommodation, food, etc. The maximum limit of exemption is the amount of LTA received from the employer.
Let’s say you receive ₹1,500 per month as LTA. With this exemption, your taxable income can reduce by a maximum of ₹18,000 (1500*12) per year.
Conditions to claim the exemption
- Leave is taken from work, and expenses have actually been incurred on travel
- Only domestic travel expenses are considered; international travel is not eligible for LTA
- Exemption is available for you as well as your family members. Family includes your spouse, children (maximum 2 two children), and wholly dependent parents and siblings.
- Not all travels are eligible. The LTA exemption can be claimed only for two journeys (i.e. twice) in a block of four calendar years, as set by the Income Tax Department. Currently, the block we are in is 2018-2021.
Now, you’re probably wondering, “I didn’t travel at all this year because of COVID-19! What’s the use of this section for the current financial year?”
Enter: The New LTC (Leave Travel Concession Cash Voucher Scheme)
Two months ago, on October 12, 2020, the Finance Minister announced the LTC Cash Voucher Scheme. The reasons were simple – to boost consumption as well as for employees to get the benefit of this section without having to travel.
Earlier, the LTC cash voucher scheme was only available for Central Government employees. But it has now been extended to Private Sector employees as well.
What exactly is this new Leave Travel Benefit all about?
Similar to claiming travel expenses, one can now claim expenses for any goods or services bought between 12th October, 2020 to 31st March, 2021. A few more conditions to be fulfilled are:
- This scheme is available only for those receiving LTA as part of their salary structure.
- You need not take any leave or travel anywhere to claim this benefit.
- Full exemption benefit is available, provided that you spend three times the amount of LTA received. So, if your monthly LTA is ₹1,500, ie. ₹18,000 per annum, you would need to spend ₹54,000 between October, 2020 and March, 2021 to claim the benefit.
- If the amount spent is less than 3 times, benefit will be provided on a pro-rata basis.
- Multiple bills are accepted. However, the purchase must be done within the period specified – 12th October, 2020 to 31st March, 2021.
- Purchases must be for goods/services that carry a GST of 12% or higher.
- Payment should be made in digital mode only – cash expenses are not allowed.
- GST invoice is mandatory to claim the exemption.
- GST invoice must be in the Employee’s name.
- This scheme is not available for those opting for the New Regime of Income Tax.
How does one claim the exemption?
To get the benefit of this section, you would need to submit the bills to your HR/Finance team along with other investment proofs.
- For FY 2019-20, this should have been done around January this year. If you had done this, great! You can claim the benefit when you file your return.
- For FY 2020-21, you may submit the eligible invoices once every month, until the end of the financial year in March 2021. It will reduce the amount of TDS that gets cut from your salary.
Can Unclaimed LTA be carried forward?
In case you have not availed any LTA exemption for this block of 4 years (2018-2021), you may carry over this exemption to the next block, provided you avail this benefit in the first calendar year (2022) of immediately succeeding block (2022-2025).
Action Items for You
- If you have not filed your Income Tax Return for FY 2019-20 yet, file it NOW! The due date is 31st December, 2020, and you don’t want to leave this task for the last minute.
- In case you spend on anything that carries a GST of 12% or higher, keep the bills and submit them to get the benefit of the new LTC Cash Voucher Scheme (Do not spend solely to get this benefit, but keep the bills if you do make an expense that is eligible).
