Non-govt staff will have to spend 7-14 times tax saved to gain from LTC scheme

Last week, the government extended the leave travel concession (LTC) cash voucher scheme to private sector employees, too. It was originally announced earlier in October for central government employees alone.

Under the scheme, employees can claim tax deduction on LTC by spending the money on buying goods and services instead of submitting travel bills.

Though this may give you the flexibility to claim tax deduction on the money spent—equivalent to your LTC allowance—on goods and services, be ready to spend 7-14 times the sum saved as tax, according to back-of-the-envelope calculations.

Also, not all spending will be eligible for the benefit. Spending on goods and services will be eligible for deduction only if they carry goods and services tax (GST) rate of not less than 12%. Such items include consumer goods items such as televisions and refrigerators, among others. Also, the goods and services have to be bought through digital mode and the employees should obtain the receipt indicating the GST number of the vendor and the amount of GST paid.

Understand the math

According to government guidelines, employees will be able to claim a tax deduction equivalent to the LTC allowance up to Rs36,000 per person for a four-member family (Rs144,000 in total), provided the employees spend three times the LTC amount claimed as deduction on buying goods and services.

Assuming a person can claim Rs144,000 as LTC and falls in the highest tax bracket of 42.74% (30% slab rate, including 37% surcharge and 4% cess on income more than Rs5 crore), he would save Rs61,551 in tax. However, in order to save Rs61,551 in tax, the person will have to spend Rs144,000x3 or Rs432,000, which is seven times the tax saved.

Now let us take an example of a person earning Rs10 lakh-Rs50 lakh (surcharge is not applicable up to this limit). This person will have to spend in the range of 10 to 14 times of the tax saved, depending on the income level, to avail of the benefit under the scheme (see table).

“However, the government has clarified that employees will be able to claim the tax deduction on a proportionate basis in case they spend a lesser amount. So, in case a person spends 50% of the required amount, he or she will be able to claim tax deduction on 50% amount, ” said Homi Mistry, partner, Deloitte Haskins & Sells LLP.

Should you go for it?

Experts said that those already planning to buy goods and services by 31 March, it’s a good option as they can claim LTC tax deduction against the money spent.

“There are many products which attract GST of at least 12%. Therefore, employees planning to spend money on these goods and services will have the option to claim the LTC tax benefit as well,” said Mistry.

However, experts caution against rushing to spend just for the sake of saving tax. “Private sector employees, unlike central government employees, who get LTC benefit over and above their CTC, have the option of getting the post-tax amount if they are not able to provide the bills. Therefore, it won’t make sense for them to spend three times the money just to save taxes,” said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.

“But for central government employees, it’s a good proposition as they wouldn’t have been able to claim the LTC benefit otherwise as travelling will be difficult in these times,” he added.

Also, employees have the option to claim LTC in the first year of the next block. As per the provisions of the Income-tax Act, 1961, the exemption for LTC is allowed to an employee for two travels undertaken within a block of four calendar years. The block applicable for the current period is calendar years 2018 to 2021.

“In case an employee is unable to claim LTC exemption twice in a block of four years, he can carry forward one journey to the next block. However, the carried forward LTC eligibility has to be utilized in the first year of the next block. For example, in case an employee has claimed LTC only once in the four-year calendar block of 2018 to 2021, he can claim LTC for travel undertaken in the first year of the next block, or in 2022. The employee can then claim two more journeys between 2023 and 2025. Also, the exemption is restricted for expense incurred on domestic travels only,” said Rituparna Chakraborty, co-founder and executive vice-president of TeamLease, a human resources company.

“While any kind of choice has its advantages, one needs to wait and watch how individuals use this flexibility given the fact that they have the option of carrying forward this to the next block,” she added.

Go for the scheme, if you are planning to buy goods and services in the prescribed time limit. Don’t overspend just to save taxes.