It appears that the benefit of the LTC scheme will not be available to employees who have opted for the simplified tax regime
India is now in the advance phases of ‘unlock’ after a long and trying lockdown. Having encountered challenges in the lockdown period, businesses are now gearing for the upcoming festive season, looking forward to reviving sales and getting back on track. What better timing than this to announce a festival stimulus package like the one the honorable Finance Minister did?
With a view to simulating demand and reviving the economy, the Finance Minister introduced two schemes to boost consumer spending – a Leave Travel Concession (LTC) Cash voucher and Special Festival advance.
LTC Cash Voucher Scheme
Every central government employee can currently avail LTC for two journeys in a block of four years. This entitles him to a reimbursement of the actual air or rail fare as per his scale and entitlement, together with leave encashment of 10 days. The current block of four years runs from 2018 to 2021. Many central government employees who planned to avail LTC may have not been able to do so due to the pandemic. Hence, in lieu of one LTC entitlement, government employees can now avail LTC in the form of a cash payout.
The employee will receive the full amount of leave encashment payment plus the fare entitlement as per his scale free of tax provided he spends the full amount of leave encashment and three times the fare amount to buy goods or services of his choice before March 31, 2021, the only condition being that the goods/services should attract GST at a minimum rate of 12 per cent (the employee will have to produce the GST invoice for the purchase) and the payment should be made digitally.
While this scheme applies to central government employees and employees of public sector undertakings and public sector banks, the Finance Minister indicated that the tax concessions for LTC will be extended to state government and private sector employees too, if they choose to give such a facility to their employees, in line with the guidelines of the central government scheme.
Private sector employees are entitled to a leave travel allowance as a part of their annual salary package but can avail a tax exemption for two journeys in a block of four years. Accordingly, in respect of 1 journey, if the employee is not able to claim an exemption in the block of 2018-2021, he can still avail the exemption if he spends his leave encashment, if any, plus 3 times the amount of his LTA on purchase of qualifying goods or services. It is not clear whether an employee who has already claimed his LTA during the year on a taxable basis (subject to TDS) can avail this exemption if he incurs the qualifying expenditure by March 31, 2021.
Further, a question arises as to whether the employer should pay out the LTA without deduction of tax in the first instance and deduct tax only if the employee does not produce evidence of the qualifying spend by March 31, 2021. One will have to wait and see the fine print of the new rules, regulations and guidelines to understand the tax implications fully. It appears that the benefit of this scheme will not be available to employees who have opted for the simplified tax regime.
Special festival advance Scheme
Festival advances to government employees were abolished on the recommendations of seventh Pay Commission. It is proposed to restore the Festival Advance to Government employees for festivals up to March 31, 2021. All central government employees can now get an interest-free advance of Rs 10,000, in the form of a prepaid RuPay Card, to be spent by March 31, 2021. The interest free advance of Rs 10,000 under the special festival advance scheme is to be paid back in a maximum of 10 instalments.
These are positive steps to revive demand and spur spending to give the much needed boost to the economy.(Homi Mistry is a Partner with Deloitte India. Mousami Nagarsenkar, Director with Deloitte Haskins & Sells LLP also contributed)