Union Budget 2021-22 Expectations for LTA, HRA: The final countdown to Finance Minister Nirmala Sitharaman’s third budget has begun, and with this various sections of society — including taxpayers, the common man and the salaried class — have set their sight on it as they have huge expectations from the Union Budget in times of the Covid-19 pandemic. Tax experts, however, say that the government had announced multiple stimulus packages in 2020 to rejuvenate the economy impacted by the pandemic. “Where on one hand it has to incur a huge sum to finance these packages, on the other hand, it has suffered a loss of revenue as some industries have been impacted severely by Covid-19. Thus, it is unlikely that the government may increase the basic threshold limit or announce any new tax deduction in the upcoming budget,” says CA Naveen Wadhwa, DGM, Taxmann.
Whatever be the case, here’s what the salaried class expects from the budget on the LTA and HRA front.
LTA for foreign travel
An employee is entitled to claim exemption for the leave travel allowance granted to him by his employer for the purpose of going on a vacation anywhere within India. This exemption is still allowed only for vacations within India. This provision may help to promote Indian Tourism but it is not in pari-materia with the current scenario as travelling to some overseas destinations is cheaper than visiting tourist destinations in India. Therefore, “it is recommended that the exemption should be allowed for both Indian destinations as well as for foreign destinations. Alternatively, the exemption should be allowed for both hotel and travel expenditure if the destination is in India and only for travel expenses if vacation happened in an overseas country,” according to Wadhwa.
Extend LTC benefits
Tax provisions for Leave travel Assistance/ Concession (LTA/LTC) for the government and private employees are the same. However, in the case of private sector employees, the LTA component is generally a part of the Cost to Company (CTC) and hence it is a part of the assured pay to the employee. What this means is irrespective of whether the employee incurs the expenditure or not, the employee will receive the amount. If the employee doesn’t spend the amount on travel, then the whole amount would be taxed in his hands. In the case of government employees, however, the amount is not paid to them unless they travel.
“The government had issued a circular granting relief to the government employees as well as those working in the private sector to avail relief on LTC even when they do not travel by incurring expenditure on purchase of goods attracting more than 12% GST by way of digital payment. This benefit was available only till March 31st. However, considering that the pandemic is still on, the government may look at extending this benefit for another year to all employees,” says Aarti Raote, Partner, Deloitte India.
Amendment in HRA
Salaried individuals staying in a rented accommodation are eligible to claim exemption for rental payments against House Rent Allowance (HRA) they receive from their employer as part of their monthly remuneration. However, the eligible deduction that can be claimed is least of three parameters – actual HRA received, rent paid over 10% of salary (basic salary plus dearness allowance), and 50%/40% of salary for accommodation in metro/ non-metro cities.
While restricting the exemption to the actual HRA received is necessary to avoid undue tax benefit, inclusion of the condition “rent paid in excess of 10% of salary” often acts as an impediment. It is often seen that for certain class of salaried individuals, 10% of their salary exceeds the rental payment for the accommodation and therefore such individuals are deprived of the HRA exemption.
“The Finance Minister could consider replacing the clause on “rent paid over 10% of salary” by “rent paid over 5% of salary” if the clause cannot be replaced with “actual rent paid”. This way, a greater number of salaried individuals would be able to avail the exemption for HRA. This will encourage individuals to stay in a rented accommodation and promote investments in real estate sector which will also go a long way in achieving the government’s vision of Housing for All,” says Sudhakar Sethuraman, Partner, Deloitte India.
Taxpayers may consider moving closer to their workplace, even into a rented accommodation if such a move results in tax benefits besides minimizing the time and effort it typically takes in commuting to work. As we know, a vibrant and active workforce can contribute significantly higher to the growth of the economy.