Due to Covid-19 pandemic almost all salaried people are not in a position to travel with family to claim Leave Travel Assistance (LTA). With a purpose to let such persons claim LTA and at the same time to boost GST (Goods and Service Tax) collection, the Centre announced a scheme on October 12, 2020, for central government employees and on October 29, 2020, for all other employees. Let us understand how the scheme works.
What is tax provision for claiming tax exemption for LTA
The tax laws allow exemption for any assistance or money received by an employee for travelling to any place within India, either for himself alone or along with his eligible family members, on holidays or otherwise or during employment or on retirement. An employee can avail of LTA for a maximum two journeys during a predefined block period of four calendar years. The current block is of 2018-2021. You are allowed to carry forward unveiled LTA to the first journey to be undertaken in the following block. It is not necessary for you to avail the LTA benefit in two journeys. You can exhaust your LTA entitlement even in one journey in the block period.
How can an employee claim LTA even without travelling?
Under the scheme, the central government employees are allowed to get cash in lieu of their leave entitlement and LTA both whereas other employees can claim LTA only, on satisfaction of certain conditions.
For claiming cash in lieu of leave entitlement you have to spend amount equal to leave entitlement for purchase of goods or services. For claiming the LTA exemption, both the categories of employees have to spend at least three times of the value of the their LTA entitlement. For claiming both the benefits, you have to buy goods and services from a seller with GST registration number and total GST payable on such goods or services is @ 12 per cent (State and Central GST) or higher. The payment has to be made through digital mode only, so purchases made through cash/cheque will not qualify for this benefit. You also have to submit original copy of tax paid invoice/s to the employer. In case full amount is not spent as required, the benefit will get reduced proportionately. Any purchase of goods/service made between October 12, 2020, and March 31, 2021, are eligible.
Who can claim this benefit?
This substitutive benefit is available only to those employees who are entitled to LTA. Though you are entitled to opt between old scheme and new scheme with lower rates for taxation, while filing your ITR so, if you have opted for new scheme of taxation under which LTA benefit is not available, you will not be able to claim this benefit unless your employer lets you revere your option.
What goods and services are eligible for this purpose?
This press release issued by the government doesn't specify any specific products or services which are eligible for such purchases. So, you can avail this benefit for buying any goods which may include electronic items for personal use like mobile phone, television, refrigerator, washing machine, laptop computers, etc. Likewise under services you can use this money for payments for various services like various insurance, payment for telephone charge, mobile, broadband payment, etc. Even subscription for entertainment packs of Netlfix, Amazon Prime, etc., will also qualify. Even if you are planning to get your house repaired or renovated , the goods used for such purposes will also qualify for this purpose on all the goods/services used on which GST payable is 12 per cent or more and the payment has been made through digital mode as explained above. The amount can be spent for purchase of any combination of goods and services.
Should you go for it?
Since for claiming this benefit you have to spend on purchase of goods or services of three time in value with a minimum GST payable @ 12 per cent, you will effectively pay at least 36 per cent of the value of LTA exemption as GST for saving tax payable on your LTA entitlement. Your income tax rates may vary between 5.20 per cent to 42.74 per cent depending on your tax slab. So, please evaluate whether it is worth to pay 36 per cent just to save the tax applicable to get cash in lieu of LTA benefits. For both categories of employees, there is a limit of Rs 36,000 per eligible person.
For example, you have four members in your family, the maximum LTA exempt in your hands would be Rs1,44,000/- (36,000*4). For claiming exemption of this eligible LTA, you will have to spend three times of this amount i.e. 4,32,000 on buying eligible goods or services. So, you will pay minimum Rs51,840 as GST here. So, before taking the final decision, please compare the income tax saving which will accrue to you against the GST outgo in case you wish to opt for it.
Current block of four year will expire next year on December 31, 2021, which is still one year away, by which time, in all probability the severity of Covid-19 may subside and you will be able to travel. Since you are allowed to carry forward unclaimed LTA to one journey in the next block, you still can spend this money on one first journey in the next block period.
This option works well for those who have anyway been planning to buy such eligible goods or services as for them the amount of income tax saving works as discount on the product/service to be bought. So, in my opinion, you need not rush up to avail this benefit unless you really need to buy those goods or services, which are eligible for this substitution.
The writer is a tax and investment expert and can be reached at firstname.lastname@example.org and his twitter handle @jainbalwant