Is Leave Travel Allowance (LTA) worth claiming?

Shimla, Manali or Goa, where are you traveling for a vacation in the upcoming new year? What if I tell you that by traveling to your favourite destination you can save a lot of tax? Yes, this is true. Now you might be thinking, how is this possible? It is possible in a Leave Travel Allowance.

Several exemptions are being provided under the Income Tax Act, 1961. Like the amount paid on the life insurance policy or interest on the housing loan. In simple words, exemption means freedom from paying taxes on specific components.

These exemptions enable employers to plan cost-to-company (CTC) in a tax-efficient manner. One such exemption is Leave Travel Allowance. Earlier LTA was introduced for PSU employees, but now according to the new rules, LTA can also be claimed by non-central government employees.

Are you eligible to claim this exemption? To what extent you can claim deductions on your travel expenses? In this article, we are going to answer all these questions. This article may help you to decide whether you should claim it or not. Let’s discuss this.

Leave Travel Allowance

Leave travel allowance is an allowance which is provided by the employer to the employee who is traveling on leave from work. It is a part of the employee’s CTC (cost-to-company).

It is exempted in the Income Tax Act, 1961, under section 10(5).

The LTA received by an employee will not be a part of his net income of the year.

In simpler words, LTA is an exemption for allowance received by an employee from his employer for travelling on leaves.

It may sound very simple, but it has several factors that need to be understood before availing such exemption.

Conditions for Claiming LTA Exemption

The several conditions to avail the exemption are:

• Actual travel is a must.

• Only domestic travel is considered - No Thailand trips will be considered. 

•  The exemption is available on the travel of the employee + family. Family include the spouse of the employee, maximum of two children, wholly or mainly dependent parents, and dependent brothers and sisters.

Eligible for LTA Exemption

Suppose you are traveling to avail the benefits of LTA. Now can you expect exemption on your hotel rents? No! That’s because the exemption is available only on the actual travel costs.

This means that you can avail exemption on the air, railway, or bus fare incurred by you. You need to keep your bills and tickets safe. No expenses such as local conveyance sightseeing, food, and so on are eligible for this exemption. The exemption is also limited to LTA provided by the employer.

Let’s understand this with an example.

Suppose LTA given by your employer = 40,000

Your Eligible travel expenses = 30,000

So, your tax exemption = 30,000

The remaining 10,000 will be added to your taxable income, and you will be required to pay income tax on it.

Now suppose, LTA given by your employer = 40,000

Your eligible travel expenses = 50,000

So, your tax exemption = 40,000

Since your employer provides 40,000 LTA, the benefits are limited to it.

Can you Travel Business Class?

You might have thought since the government is giving you LTA on travel, which covers only travel expenses. So, can you travel in a business class and claim the expense? The answer is No!

• By Air: If you travel by air, the exempt fare is restricted to economy class fare for the domestic flight. However, the individual can claim their exempt fare for connecting flights if there are no direct flights available.

• By Train: If you travel by train, the exempt fair that can be claimed is restricted to the fair of the first class. The individual can claim their exempt fare on the direct trains, except if no direct train is available to your destination. 

• By Bus: If you decide to travel by bus, then you can claim exemption limited to the fair of deluxe bus fare. 

• Multiple Destination: Exemption on multiple destinations is not valid. One can claim an exemption for only one destination.

Block of Year

Can you claim LTA exemption every year? No! You can claim only two journeys in a block of four calendar years. The current block year is 2018- 2021. 

What’s New in LTA?

Private sector employees are also allowed to claim LTA in the form of Leave Travel Concession (LTC). According to the new scheme, the individual needs to spend 3-times of the LTC they want to claim. They also need to submit their bills of the expenses to their companies. The same would apply to the LTC cash voucher scheme.

Under the new scheme, employees have a choice to use their LTA for the purchase of electronic goods, home appliances, and other consumer products that attract a goods and services tax (GST) rate of 12 percent or higher. Individuals need to make these purchases before 31 March 2021. Also, Individuals need to make digital payments for these goods and services to redeem this exemption.

Should you avail this facility?

If you were already planning such an expense, then it is an excellent opportunity for you to avail the exemption and save taxes. However, if you are making purchases only to avail exemption, then this might not be a good idea as this might affect your cash flows. You need to take the decision wisely.

The Bottom Line

It is clear from the scheme of the government that they are trying to boost consumption in the economy. Due to significant cuts in the salaries of several employees, the demand has been lower for consumer products like electronic goods.

This income tax benefit might lead to a rise in consumption. This might be beneficial for some, so make sure that you do your tax planning wisely.