To improve demand in the upcoming festive season, the finance minister announced additional leave travel allowance benefits to be used before March 31, 2021. But many clarifications are awaited
Ahead of the festive season, Finance Minister Nirmala Sitharaman made a slew of announcements aimed at boosting consumer demand, which was adversely affected by the COVID-19 pandemic.
She announced an optional leave travel concession (LTC) cash voucher scheme for central government and PSU employees. Under this scheme, they can choose to encash their LTC of 10 days and and travel fare tax-freereceive an additional amount equal to three times the travel fare, provided they spend this amount to shop for goods attracting GST of over 12 per cent. “The intention is to encourage spending of such an accumulated amount – as actual travel may not be undertaken by central government employees – on such goods or services to revive the consumption cycle. As Rule 2B of the Income Tax ACT provides for the rules on Leave Travel Allowance, there could be changes expected in these rules to incorporate the announcement by the FM on Monday,” says Suresh Surana, Founder, RSM India, a tax consultancy firm.
Private companies and state governments are also allowed to facilitate the scheme for their employees. “Employees can now use the funds which would have remained unutilised otherwise. On the flipside, allowing cash vouchers to be spent only on items under the GST slab rate of 12 per cent or more is not very feasible for middle income families,” points out Prashant Singh, Vice-president and Business Head, CPO, Teamlease Services.
How will the LTC cash voucher scheme work for central government and PSU employees?
Government employees are entitled to claim tax-free LTC – or leave travel concession – twice in a block of four calendar years under section 10(5). The current block runs from 2018 to 2021. It is meant to help employees who go on a holiday with their family members, including spouse, dependent parents, siblings and children. Private sector employees, too, are eligible for similar benefits if the leave travel allowance (LTA) is part of their remuneration structure.
Since many will not be able to take a vacation this year, the central government has come up with this cash voucher scheme to encourage them to spend the amount on goods. Under this scheme, they can opt to encash their LTC and also receive the ticket fare they are eligible for, tax-free, as per their class of entitlement.
However, you can take these benefits only if you fulfil certain conditions.
What conditions do I need to fulfil to be eligible for these benefits?
Since the primary objective is to boost consumption, employees opting for this scheme will have to use the amount – three times the fare and one-time leave encashment – to purchase goods which attract GST of over 12 per cent. The purchases will have to be made before March 31, 2021.
However, you cannot use the amount to shop through cash. You will have to mandatorily use digital payment modes and produce the GST invoice to qualify for the pay-out.
I am employed with a private sector entity. Will I benefit from the scheme?
FM Sitharaman announced that state government and private sector employees, too, can claim the benefit, if their employers decide to match the offerings. “The spending requirement would be similar to that required for central government employees. However, the finer details are awaited, which could be by way of amendment to rule 2B of the income tax rules, which provides for the rules for availing tax exemption on LTA,” says Surana.
Which are the other areas that need clarity?
“Greater clarity needs to emerge on certain aspects. For instance, if say, a private sector employee is not able to buy goods equal to three times the LTA, but manages to make purchases amounting to twice the fare, will the tax break be extended on a pro-rata basis? If the LTA has been paid in say, September 2020 but the purchase of goods is made in November 2020, will the tax benefit be extended for such purchase?” asks Homi Mistry, Partner, Deloitte India.“It remains to be seen how the eligible fare will be calculated. For example, ordinarily, if you were to travel from Delhi to Bangalore by train, the actual rail fare is reimbursed. Details on how the distance and fare be calculated now are yet to be out,” points out Karan Batra, Founder, Chartered Club, a tax consultancy firm.