Govt’s LTC scheme is a step in the right direction, but needs more clarity4 min read . Updated: 20 Nov 2020, 07:41 AM IST
More clarity may come once the law is amended and a notification is issued
In one of the recent fiscal stimulus packages, the finance minister announced the leave travel concession cash voucher scheme (LTC scheme), whereby deemed LTC fare may be claimed as exempt from income tax without any actual travel, provided the recipient employee incurs specified expenditure.
As per the new LTC scheme, an employee will be eligible for deemed LTC fare which will be exempt from tax, subject to the following conditions: (a) The employee should buy goods or services worth three times the deemed LTC fare between 12 October 2020 and 31 March 2021; (b) The money should be spent on goods or services attracting a GST of 12% or more from a GST-registered vendor; and (c) The payment should be made through digital mode. The new LTC scheme, which was first announced for central government employees was recently extended to non-central government employees, including private sector employees.
Under the existing scheme, exemption from tax is available in respect of two journeys undertaken in a block of four calendar years (the current block is 2018 to 2021) for travel to any place in India. The exemption is available for travel by the employee and his family. The family of the employee includes his spouse and children (up to two) and parents, brothers and sisters, wholly or mainly dependant on the employee. The exemption is limited to air fare, air-conditioned first-class rail fare or first-class or deluxe fare depending upon the mode of travel. The key requirement is that the employee should take leave and travel to avail the tax exemption.
Why is the new LTC Scheme attractive?
Due to travel restrictions, an employee and his family may not be able to travel to claim the exemption under the existing provisions of the Income-tax Act, 1961. Hence, the new LTC scheme gives an option to the employee to spend on eligible goods and services instead of travelling to claim the tax exemption. An employee who avails the tax exemption under the new LTC scheme will be deemed to have availed one journey in a block of four calendar years.
Under the new LTC scheme, the deemed LTC fare can be up to ₹36,000 per person per round-trip. For example, an employee’s family of four (self, spouse and two children), would get a maximum eligibility of ₹1,44,000 for the purpose of the new LTC scheme. For availing the tax exemption of the full amount of ₹1,44,000, the employee will be required to spend ₹4,32,000 on eligible goods and services.
The government has clarified that the invoice for the goods or services, as per the new LTC scheme, may be in the name of the employee, spouse or any family member in respect of whom the employee is eligible to claim LTC fare. The digital payment for the said expenditure may be made by any such family member.
The government has also clarified that even services like interior decoration and phone bills are accepted provided GST is 12% or more.
What is the challenge?
So, should an employee start to provide his employer with invoices of all goods and services which attract GST of 12% or more and demand reimbursement of LTC amount and consequential tax exemption. The answer is not straightforward.
For the new LTC scheme to work, the guidelines issued by the central government are required to be followed. Hence, where the employers follow a cost-to-company (CTC) model and leave travel assistance or allowance (LTA) is within the CTC, employers may be required to formulate and introduce an LTC scheme, as per the central government guidelines.
As per the guidelines, the LTC lapses if it is not claimed through actual leave and travel and any unutilized LTC needs to be refunded or recovered if already paid in advance. Although actual leave and travel is not required under the new LTC scheme, the condition of lapsed LTC and refund or recovery of LTC poses a practical challenge. The government has made it clear that if three times the deemed LTC fare is not spent, the pro-rata excess amount of deemed LTC fare can’t be paid to the employee and excess advance, if any, must be recovered from the employee.
An employee who has already availed exemption by undertaking two journeys in the block of 2018 to 2021 calendar years (for example, one in calendar years 2018 and 2019 each) will not be able to claim the benefit under the new LTC scheme.
The government has issued two press releases and four office memorandums providing guidelines and FAQs. More clarity may come once the law is amended and a notification is issued.
The new LTC scheme is an innovative solution introduced by the government aimed at bringing tax relief to the employees and serve the larger agenda of the government to stimulate demand and encourage consumption by linking tax exemption to spending by the employees.
Sonu Iyer is national leader, people advisory services, EY India