How LTC/LTA scheme can be beneficial for an individual taxpayer2 min read . Updated: 01 Dec 2020, 06:23 PM IST
- While employees are aware that they would need to expend three times the amount of LTA exemption, one needs to ensure that all conditions in the scheme are met to avail of the tax break
- Employees who have opted for the simplified tax regime (new tax regime) are not eligible to claim tax relief under this scheme.
The introduction of LTC scheme by the Finance Minister has triggered interest amongst employees. Employers have been receiving inquiries from employees keen to avail of the benefit under the scheme. While employees are aware that they would need to expend three times the amount of LTA exemption, one needs to ensure that all conditions in the scheme are met to avail of the tax break.
About the scheme
The intention of the government in introducing this scheme is two-fold - firstly to grant exemption to employees for big spends in lieu of travel costs and, secondly, to increase the consumer spend.
On account of Covid-19 pandemic and the resultant nationwide lockdown, there has been a disruption in transport and hospitality sector. Further with the need for observing social distancing and to keep themselves safe, employees have not availed of the LTC benefit in the current year.
The conditions to avail of the exemption are highlighted in the below table -
The scheme also provides that in case the employee spends a lower amount, the total amount payable would be proportionately reduced. Further employees who have opted for the simplified tax regime (new tax regime) are not eligible to claim tax relief under this scheme. However such employees may consider to re-opt for the current tax regime, if this is an option provided by the employer, to avail of the benefit under the scheme.
The circular also provides illustrations for easy understanding on the quantum of amount to be spent by the employees and the benefit that can be availed. Further in case an employee has already claimed tax break for two trips in a block of 4 years from 2018-2021, then he cannot avail of the scheme. The employee can also purchase several articles up to the threshold.
It has also been clarified that only payment of premium for insurance policies purchased during the aforesaid period (12 October 2020 to 31 March 2021) is eligible under the scheme. As such, payment of premium of existing policies would not qualify.
In case the amount spent is less than as required, then the exemption would be allowed only proportionately. To clarify, let us look at the below example –
Mr. A is entitled to LTA of INR 120,000 and has a family consisting of his spouse and 2 children, eligible for the benefit. To claim the maximum benefit of exemption, Mr A would need to spend three times the amount of the lower of the below –
a. INR 120,000
b. INR 144,000 (INR 36,000 *4)
i.e., he has to spend INR 3,60,000 on purchase of goods/ services that attracts GST of 12% or more.
If he spends only INR 2,40,000/- then the LTA amount of only INR 80,000 (2,40,000/ 3,60,000*1,20,000) would be exempt and the remaining amount of INR 40,000 would be taxable.
If Mr. A who is entitled to LTA of 40,000/- and who is in need of an AC, can buy AC for INR 1,20,000 and claim the tax exemption for INR 40,000/-. In this case, Mr. A would anyways have spent for purchase of AC, but with the introduction of this scheme, he is able to spend and save tax of about INR 12,480/- (assuming he falls in the tax bracket of 30%) on INR 40,000/-.
Given that the expenditure could entail exemption, it would encourage employees to spend on the necessary items, thereby giving a boost to consumption, demand and to revenue collection for tax authorities, thereby a win-win situation for all.
Aarti Raote, Partner, Deloitte India and Poornima G, Manager, Deloitte Haskins and Sells LLP