The pandemic situation on account of COVID-19 has imposed severe travel restrictions on people all over India. In the current financial year (2020-21), most employees wouldn’t be able to claim tax benefit on LTA. The Government of India, in a bid to address the issue of tax exemption on LTA and in order to boost consumption, has announced that salaried employees can buy goods and services in lieu of incurring expenses on leave travel and use the expenditure information for availing tax benefit. The Government of India calls this “LTC Cash Voucher Scheme” and has extended the tax benefit from this scheme to private sector employees as well. You can read the press release here.
Let us take a look the conditions for availing this benefit.
Can an employee avail this benefit during the current block (2018-21)?
Yes, they can. However, if an employee has availed (prior to FY 2020-21) the maximum permissible number of tax exemptions (twice) for the block period 2018-21, they cannot avail tax benefit under this scheme. An employee needs to have at least one exemption in the block period (2018-21) to be able to avail tax exemption under the scheme.
What kind of expenditure is eligible for this scheme?
The Government of India has not notified an exhaustive list of permissible expenditures. Any expenditure (goods or services) can be considered for this purpose as long as the GST on the expenditure is 12% or higher. This means that employees should buy the goods or services only from registered GST vendors.
When should the expenditure be incurred and what should the mode of payment be?
The expenditure should be incurred between 12-Oct-2020 (date of Government of India circular announcing the scheme) and 31-Mar-2021. In other words, the invoice /receipts for the expenditure should contain a date between 12-Oct-2020 and 31-Mar-2021 (both dates included).
The payment should be made by way of a digital payment (credit/debit cards, UPI, Wallets, Net/mobile banking, etc.). Payment by cash cannot be considered as digital payment.
How much should an employee spend on goods/services under this scheme?
The employee should spend a sum which is equal to three times the LTA amount received by the employee. For example, if an employee receives Rs 30,000 as LTA, they should spend Rs 90,000 (Three times Rs 30,000) to avail full benefit under the scheme. In case the employee spends less than thrice the LTA amount, the tax benefit shall be reduced proportionately. For example, if the employee spends only Rs 45,000 (instead of Rs 90,000), the tax benefit will be available only to the extent of 50%, i.e. Rs 15,000 in the example stated above.
What is the maximum benefit available?
The Government of India has notified that irrespective of the actual LTA amount paid to an employee, a maximum of Rs 36,000 per person shall be available as the benefit. The term person refers to a person in the employee’s family as per Section 10(5) of the Income Tax Act which specifies rules related to tax exemption on LTA. For example, if the employee has 4 members in his family, the maximum benefit the employee can avail is Rs 144,000 (Rs 36,000 x 4), in case the actual LTA amount paid is higher than Rs 144,000. In addition, the employee has to spend Rs 4,32,000 (3 times Rs 144,000) in order to avail 100% tax benefit on the expenditure.
Can an employee make multiple purchases of good/services?
Yes, employees can submit multiple invoices/receipts for this scheme. However, the dates of all the invoices/receipts should fall between 12-Oct-2020 and 31-Mar-2021.
Are purchases made on an EMI basis eligible?
Yes, purchases made on an EMI basis can be considered as long the date of purchase is between 12-Oct-2020 and 31-Mar-2021.
Should employees submit invoices/receipts to the employer?
The original GST invoice/bill /receipt or a self-attested copy of the GST invoice/bill/receipt should be submitted by the employee.
The invoice/bill/receipt should be in the name of the employee or their family members.
What about employees who have opted for the Simplified Tax Regime?
Employees who have opted for the Simplified Tax Regime (under Section 115BAC of the Income Tax Act) cannot avail tax benefit under this scheme.