Now everyone can get income-tax exemption for payment of deemed LTC fare

Published: November 6, 2020 at 11:03 am

Last Updated on October 1, 2023 at 9:21 pm

The Government launched an LTC (Leave Travel Concession) Cash Voucher Scheme for Central Government employees on 12th October 2020 to enable employees to purchase goods and services instead of availing LTC & leave encashment. On 29th Oct, they have extended it, non-central govt employees, as well. Now the private sector, public sector and state govt employees can also avail this offer. Here is how the scheme works.

About the author: Harshini Gopu works in a global financial institution as a senior associate. She is experienced in credit risk and capital management. Her financial blog is Learnfineasy. She is also a budding artist. Also by Harshini: Factors that determine your CIBIL score and how to improve it and Interest Rate Swaps: A way for MFs to reduce interest rate risk.

This is a reimbursement scheme for LTC expense to revive the economy. Since people couldn’t travel in this pandemic situation or some don’t want to travel, Government is providing an alternative plan to make the employees use those funds so that there is a boost for consumer demand.

How does the scheme work? The scheme is applicable for the block 2018 to 2021. Government has fixed 3 slab rates of LTC according to scale/position of the employees and it will be offered to the employees provided they spend the amount on any Goods/Services which attracts GST over 12%.  Purchase to be made before 31st March 2021 and only through digital mode.

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There are no changes done in taxation. LTC fare is non-taxable and the leave encashment amount is taxable as usual. The scheme is also extended to non-central government employees also.

The deemed LTC fares are fixed in the following way: Category of Employees and Deemed LTC fare per person

  • Employees who are entitled to business class of airfare Rs.36000
  • Employees who are entitled to an economy class of airfare Rs.20000
  • Employees who are entitled to rail fare Rs.6000

The twist here is, we have to spend 3 times the deemed LTC amount entitled to avail the tax exemption benefit. And the purchases should be done only through digital mode and with GST registered vendors.  It may be noted that in order to avail this package an employee should opt for both leave encashment and LTC fare. Also, 100% of the leave encashment amount and 50% of the LTC fare can be availed as an advance and remaining 50% of the LTC fare can be claimed by producing valid GST receipts after spending on items which are taxed over 12% GST.

Example: Employee with 2 other family members (total 3 persons) who is eligible for economy class airfare. Let’s say his Basic plus DA for one month in Rs.120000/-. Leave encashment for 10days = ( 120000 / 30 ) * 10 = Rs. 40000/-. LTC fare eligible amount = Rs.20000/-(per person); 3 persons so Total Rs.60000/-. Total eligible amount is Rs.60000 + Rs.40000 = Rs.100000

Note: 100% of the leave encashment amount and 50% of the LTC fare can be availed as an advance. Amount to be spent on goods/Service where the GST is more than 12% = Rs. 40000 + ( 3*Rs.60000 ) = Rs.  40000 + Rs.180000 = Rs.220000

Amount to be spent extra from employee savings = Amount to be spent (-) Eligible amount = Rs.220000-Rs.100000 = Rs.120000. After the expenditure, if we provide the GST receipt remaining 50% of eligible LTC can be availed. What happens if the employee spends only Rs.165000 instead of Rs.220000? Leave encashment amount Rs.40000/- is 18.18% of Rs.220000  LTC fare amount Rs.60000/- is 27.27% of Rs.220000.

Similarly, if the employee spends only Rs.165000 then eligible leave encashment is 18.18% of Rs.165000 and eligible LTC is 27.27% of Rs.165000. The total eligible amount will be Rs.75000 approx. If advance received is more than the eligible amount, it has to be returned back with penal interest.

The conservative estimates of the Government are that if government employees and PSU/PSB employees opt for the scheme then it would cost around Rs.7600 crore which anyway they will have to bare since LTC is an existing scheme which is not currently used by the employees due to the pandemic situation.

The demand infusion is estimated to be around 19000 crores approx. If the State Government also offer similar scheme then at least Rs.9000 crore more will be infused.

Special Festival Advance Scheme: After the implementation of the 7th pay commission, festival advance scheme has been abolished. Now it’s decided to offer to all the central government employees as a one time measure.

Irrespective of the position/scale,  Rs.10000/- is being offered to all employees and it should be repaid in 10 instalments. The scheme will be available till 31st March 2021. The advance amount will be given as a prepaid Rupay card and not as cash. This amount can be spent anywhere and there are no restrictions on GST slab or vendors, unlike the LTC cash voucher scheme. Cash withdrawal is not allowed through this card and spending should be done before 31.03.2021.

The estimated advance which is to be given to central government employees is to be approx 4000 cr. If the State government also offer the same to their employees then another 4000-8000 cr to be disbursed and additional consumer demand can be generated.

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