Exemption for LTC Cash Scheme

Section 10(5) of the Income-tax Act, 1961 

Section 10(5) provides an exemption for leave travel concession (or assistance) received by an employee from his employer (or former employer) for himself and his family. The quantum of the exemption depends upon actual expenditure on fare incurred by the employee for himself and his family (subject to a few conditions).

• • • Amendment – Section 10(5) has been amended for the assessment year 2021-22 to provide tax exemption to cash allowance in lieu of leave travel concession. By virtue of this amendment, the value in lieu of any travel concession (or assistance) received by (or due to) an individual shall also be exempt for the assessment year 2021-22, subject to fulfillment of prescribed conditions. Further, it has been provided that where individual claims and is allowed exemption under this amended provision in connection with prescribed expenditure, no exemption shall be allowed under section 10(5) in respect of the same prescribed expenditure to any other individual.

The conditions for this purpose shall be prescribed in the Income-tax Rules in due course and shall, inter alia, be as under –

• • • The employee exercises an option for the deemed LTC fare in lieu of the applicable LTC in the block year 2018-21.
    • Specified expenditure means expenditure incurred by an individual or a member of his family during the specified period on goods or services which are liable to tax at an aggregate rate of 12 percent or above under various GST laws and goods are purchased or services procured from GST registered vendors/service providers.
    • A specified period means the period commencing from October 12, 2020 and ending on March 31, 2021.
    • The deemed LTC fare for employees who are entitled to business class airfare is Rs. 36,000 per person (round trip). It is Rs. 20,000 per person (round trip) (in the case of economy class airfare) or Rs. 6,000 per person (round trip) (in the case of rail fare).
    • The amount of exemption shall not exceed Rs. 36,000 per person or one-third of specified expenditure, whichever is less.
    • The payment to GST registered vendor/service provider is made by an account-payee cheque/draft, or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA [e., (a) credit card, (b) debit card, (c) net banking, (d) IMPS (Immediate Payment Service), (e) UPI (Unified Payment Interface), (f) RTGS (Real Time Gross Settlement), (g) NEFT (National Electronic Funds Transfer) and (h) BHIM (Bharat Interface for Money) Aadhaar Pay].
    • Tax invoice is obtained from such vendor/service provider.
    • If the amount received by (or due to) an individual as per the terms of his employment, from his employer in relation to himself and his family, for the LTC is more than what is allowable to such person under the aforesaid provisions, the exemption under the amendment would be available only to the extent of exemption admissible under above-listed provisions.

Clarifications

A few clarifications have been issued vide Office Memorandum No. 12(2)/2020-E.II(A), dated October 20, 2020 –

• • • An individual need not take leave for this purpose, nor undertake any travel. This is a scheme in lieu of LTC travel.
    • An employee can avail of this scheme utilizing the applicable LTC fare without leave encashment. The expenditure should be in accordance with the ratio as prescribed for LTC fare [the same is explained in the example given (infra)].
    • The employee may use any one of the LTC available in the block year 2018-21.
    • Multiple Bills are accepted. The purchase should have been done on and after October 12, 2020, but on or before March 31, 2021. The purchase should carry a GST at 12 percent and above and payment should have been made by digital mode.
    • There is no prescribed format. A simple application conveying the desire of the employee for availing of the scheme is sufficient. If the advance is required for the purpose, the same is to be mentioned.
    • An employee can avail of the scheme partially, e., of the LTC of part of the eligible family. Since this is an optional scheme, if the LTC fare of any member of the family has not been utilized for this purpose, that member can avail LTC subject to instructions under LTC rules.
    • The invoice (which is being submitted for reimbursement under the scheme) should be in the name of the employee who is availing of the scheme.
    • Any service which is having a GST component of more than 12 percent is permissible.
    • Procurement from the e-commerce platform is also permissible provided the relevant invoice/details are submitted.

Example

X is a Central Government employee posted in New Delhi in the Ministry of Commerce and Industry. The following information is available – Salary: Rs. 1,43,000 per month, dearness allowance: 17 percent, house rent allowance, and other allowances: Rs. 93,700 per month.

X wants to know whether (or not) tax exemption is available under special cash package equivalent in lieu of leave travel concession. He is eligible for business class airfare for himself, his spouse, and two minor children. He wants to claim maximum cash equivalent in lieu of LTC including leave encashment. X has not claimed any LTC (or claimed one LTC) in the block period 2018-21.

The following calculations are based on the Office Memorandum, dated October 12, 2020 –