With the ongoing festival season and new year ahead, many are planning a vacation to explore new places and meet relatives.
Salaried employees can claim tax benefit under Section 10(5) of the Income Tax Act, 1961, for the travel expenses during this period. The benefit can be availed as a Leave Travel Allowance (LTA) exemption.
LTA is the most common form of compensation given by employers to employees for travel in India while on leave. A salaried employee can claim exemption on LTA twice in a block of four calendar years. However, this benefit can be availed just once in a year.
The tax exemption covers the cost of the ticket for spouse, children (up to two) and parents and siblings dependent on the employee. For children born after October 1, 1998, the exemption is restricted to only two surviving children unless one birth has resulted in multiple children like twins and triplets. If for any reason the employee is not travelling with his family, no LTA can be claimed by him. You also have to take leave for at least five days from office, which will be a proof of your travel.
Under the provisions, the exemption will be lower than the actual expenditure incurred.
It does not include the cost
for staying in a hotel or any
entertainment expenses during the vacation. Foreign destinations are not covered by this exemption.
For air travellers, economy class fare for the shortest route is given to the employee. For those planning to go by train, second AC fare for the shortest route is given. For destinations not connected by rail, one can travel in deluxe bus. If no recognised public transport system exists, first AC rail fare for the equivalent distance is considered. To avail the tax benefit, the employee need not submit the proof of travel.
Some years ago, the Supreme Court gave a ruling that employers, while reimbursing LTA claims of their employees, are under no statutory obligation to collect travel documents like rail ticket, bus ticket, boarding passes or invoice of travel agencies. The apex court order came after a hearing of a case between Larsen & Toubro and the income tax department. The department had argued that the employer was required to collect proofs from the employee for LTA. ?The beneficiary of the exemption under Section 10(5) (of the Income Tax Act) is an individual employee. There is no circular of the Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the declaration to be submitted by an employee(s),? the Supreme Court order said.
Significantly, if an employee claims LTA without travelling, the entire amount received by the employee will be taxable. In fact, in 2005, when the government introduced the Fringe Benefit Tax, which was later removed in 2009, provisions of paid holiday were subject to FBT in the hands of the employers and not taxable in the hands of individuals. If the employee changes job, he can get the LTA not only from the present organisation but also from the former employer.
If for any reason, the employee is not in a position to go on leave, he can claim the exemption in the next block and use it in the calendar year immediately following the block. If your LTA is not utilised, it will get added to your salary and you will be taxed for it.
However, the proposed Direct Taxes Code seeks to do away with this benefit from its list of exemption. Various employee organisations have petitioned the government to reconsider the proposal. Analysts say LTA could be clubbed as a part of the income and then deductions allowed. Currently, LTAs doesn?t reflect in either salary slips or Form 16.
While the Direct Taxes Code proposes to retain exemptions such as house rent allowance and leave encashment, it seeks to remove LTA exemption from the list. The exemption limit for medical reimbursements, however, is sought to be increased.
Encash your leaves
While you can claim tax exemption on your LTA, you can also encash your pending leave to earn some extra money for your Deepawali shopping and celebrations. But mind you, before you do that be sure of the tax implications of encashing your accumulated leaves.
Employees encash their leaves when they are due to expire while in service. One can encash the leave after resigning from the company and adjust with the notice period if any. Lastly, one can encash the leave at the time of retirement. But investment analysts say typically government and public sector employees encash their accumulated leaves during festive seasons for that extra spending.
In case, you encash your leaves after resigning from the company, the amount received is non-taxable. So, if one has changed a job in a particular financial year and have received leave encashment amount, then one needs to deduct the amount from total income and compute the income tax. On the hand, if the leave encashment amount is received while you are still in service, it is added to your income and is fully taxable as the per the income tax slab applicable to you.
For government employees, maximum of 10 months of leave encashment, based on last 10 months average salary is done. For government employees and most public and private sector companies, the maximum allowable leave per year is 30 days for each year of one’s service in that company. At the time of paying the leave encashment amount to the employee, the firm will deduct TDS from the amount.