Budget 2020 Expectations for Salaried Taxpayers: Leave Travel Allowance, commonly known as LTA, represents payment made by an employer to its employees for travel expenses incurred while on personal leave. Considering that such allowance is eligible for tax exemption, it is widely offered as a flexible salary component to the employees across various organisations in the private sector.

Framework for LTA exemption

As per the provisions under the Income-Tax Act, 1961 (Act), exemption for LTA is allowed to an employee for two travels undertaken within a block of four calendar years. The block applicable for the current period is calendar years 2018 to 2021. In case an employee is unable to claim the LTA exemption twice in the block of four years, he can carry forward one journey to the next block. However, the carried forward LTA eligibility has to be utilised in the first year of the next block. For example, in case an employee has claimed LTA only once in the four-year calendar block of 2018 to 2021, he can claim the LTA for travel undertaken in the first year of the next block, ie. in 2022. The employee can then claim two more journeys between the years 2023 and 2025. Also, the exemption is restricted for expense incurred on domestic travels only.

Family covered for LTA exemption

An employee may claim the exemption for LTA incurred for himself and family members specified under the Act for this purpose. Family includes spouse and children, whether dependent or not, and parents, brothers, sisters who are fully or mainly dependent on the employee. Only up to two children are covered, except in case of multiple births after first child.

Expenses covered under LTA

Currently, the law provides LTA exemption for the following travel cost incurred by an employee:

LTA – the expectations

The existing tax provisions related to LTA provide significant benefits in terms of saving taxes for employees on one hand and promoting tourism within India on the other hand. However, these tax provisions were brought in several years ago and have not been reviewed since then.

With the passage of time a host of factors such as change in the standard of living, increased spending power, awareness about various tourist destinations, better connectivity and infrastructure providing access to remote areas in India, etc have fuelled employees’ desire to travel and experience new destinations. It may, therefore, be time to re-visit the LTA provisions under the current tax laws and introduce changes. Salaried taxpayers have huge hopes from the Union Budget 2020 that along with reducing the tax rates, the government may also incentivize them with other tax benefits like improved benefit under LTA, increase in deduction for investments, etc. that would leave more money in their hands.

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One of the expectations of the salaried class taxpayers and especially, of the millennials entering the workspace, is to extend the LTA exemption to overseas travels as well. It is well known that in the last few years, travel to destinations both within India and outside have become very popular with employees across the industries. Many Indian states have launched tourism drives which showcase and endear the destinations within the states. Thus, the government may consider extending the LTA concession on an annual basis. The government may also consider allowing LTA exemption for foreign travels as well, although some limit can be imposed in terms of the amount of exemption for such foreign travels or restriction as to number of travels in a block period etc.

Further, now a days, the youth of country is preferring wandering and exploring the lands by their own vehicle. To encourage such spirit, the claim of exemption may be extended to such travels as well and allowed to claim tax exemption for the expenses incurred on fuel.

Apart from the travel cost, expenses towards boarding and lodging also form a major share on individual’s expense on any travel. It is also seen that many times that it is not the travel cost which consume more amount, instead stay at hotel and other expenses forms a major part of spending. In this scenario, expenses incurred by an individual towards stay or accommodation at hotels/ guest house etc which are accredited or registered with the State Tourism Authorities may also be considered for the purpose of tax exemption. This amendment will not only help individuals in claiming higher LTA exemption, but will also help the Indian tourism and hospitality sector.

To sum up, all eyes are on the upcoming Budget 2020 by Hon’ble Finance Minister Nirmala Sitharaman, with a big hope of reduction in their overall tax burden. LTA is one of the popular components of the salary structure and presents the government with an opportunity to achieve two objectives with a single stroke, ie save taxes and boost tourism.

(By Akhil Chandna, Director–Grant Thornton India LLP, with inputs from CA Pooja Lara)