After the announcement of the cash in-lieu of leave travel concession (LTC) scheme by Finance Minister Nirmala Sitharaman and further details shared later, it is time for government employees to decide whether they should opt for it. Here, some key questions on the scheme are answered.
How will the scheme work? How can I claim the benefits?
On Monday, Finance Minister Nirmala Sitharaman announced an LTC cash voucher scheme for central government and public sector employees. Usually, they can claim tax exemption on LTC fare reimbursement twice in a block of four calendar years after producing their travel bills. The current block runs from 2018-2021. This year, the COVID-19 pandemic has made travel difficult.
Under the cash-in-lieu of LTC scheme, such employees can receive their leave encashment (worth ten days’ basic and DA) and get reimbursement for the travel fare they are eligible for, as per their grade. For example, if they are entitled to business class airfare, their notional fare eligibility would be Rs 36,000 per person, as determined by the finance ministry (see table). But to take this scheme, you will have to spend three times the LTC fare and also the leave encashment. The spending has to be done through the digital mode before March 31 on goods and services that attract GST of 12 per cent or more.
Remember, only the fare component will be tax-free – your leave encashment would be subject to tax. You will have to opt for both leave encashment and LTC fare to be eligible for this tax relief package. The finance ministry’s office memorandum states that up to 100 per cent of the leave encashment and 50 per cent of the deemed fare could be paid into employee’s bank account and settled later after bills are furnished.
This apart, the ministry’s clarification on Tuesday made it clear that, ordinarily, a person is not eligible for LTC unless he actually travels. “If he fails to travel, the amount is deducted from his pay and he may be liable for disciplinary action. He does not have the option of keeping the money and paying income tax. Under the government system, the employee had only two choices: 1) Travel and spend (and the incidentals like hotel, food, etc. are to be incurred by him); or 2) Forgo the entitlement if not claimed within the date. Now a third option of "spend on something other than travel" has been given,” the note explained.
Should I opt for it when I have to spend much more than what I will receive, in spite of the tax exemption?
The answer depends on your planned expenditure through this year and next as also your assessment of your job security in the future. After all, as the finance minister stated, public sector employees have not had to fear job loss or pay cut risks this year, and hence are in a position to spend. “If they intend to make big-ticket purchases in 2020 or 2021, they should expedite it and complete the transaction before March 31. So, in effect, a part of their expenses will be subsidised by the government,” says Karan Batra, Founder, Chartered Club.
Moreover, their LTC will remain unutilised if they don’t file a claim this year. “Unlike the private sector, where employees have a CTC concept, most government employees have a reimbursement concept. They have to submit bills to claim the LTC. So, if they do not travel due to COVID-19, they will not receive the LTC. So, here, they can submit bills of purchases made and claim the amount,” explains Aarti Raote, Partner, Deloitte India.
But finally, you will have to take a call based on your requirements. If you are a government sector employee and had planned some purchases in any case this festive season or next year, the scheme will help. “They can advance such planned expenditure – for instance, any goods that attract 12 per cent GST or more like television set or refrigerator – that they intended to purchase later. Then, there are expenses that people tend to postpone. So, if you fall in this category, you can spend on such purchases collectively now,” says Raote.
But will it not be difficult to arrange for such huge sums before March 31, 2021? “Paying three times the fare and one time leave encashment amount will mean strain on cashflows, but rather than losing this offer, employees can avail of EMI facilities or loans to make their purchases,” advises Sonu Iyer, Partner, People Advisory Services, EY.
If you had not planned any expenses, however, the pre-conditions of the scheme will render it impractical as that would mean unnecessary spends.
I am a private sector employee. Should I opt for this scheme if my employer offers it?
You will have to wait and watch until further details emerge. The finance minister had announced that state government and private sector employers, too, could extend the scheme to their staff. But the picture remains unclear, in the absence of specific guidelines for corporates. For corporate employees, LTA is usually part of cost-to-company. Ordinarily, if you produce airfare or rail fare bills to support your travel claim, you will be able to avail of the tax exemption twice in a block of four years. “It is a lump-sum amount and not linked to eligible fares that will be reimbursed and taxed as per the LTC provisions. There may not be a policy of annual leave encashment in case of most corporates. It is only done at the time of retirement or job switch. So, we need clear guidelines and parameters for quantifying the benefits for private sector employees,” says Raote.
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