Income tax exemption on your LTA depends on mode of travel

Vacation is one of the best ways to break away from our busy work schedules and spend time with family. Many employers grant leave travel assistance (LTA) to their employees as part of their compensation plan that is eligible for a tax exemption.

Who is eligible for exemption? According to Section 10(5) of the Income-Tax Act, 1961, exemption is available to an individual who receives LTA from his employer for expenses incurred on travelling to any place in India with his family. Family includes spouse and children as well as parents, brothers and sisters who are mainly dependent on the individual. The exemption can be obtained for a maximum of two children. The exemption will not be available if the employee is not on leave and the family members are travelling separately.

Expenses eligible for exemption: The exemption is available for travel expenses and the mode of travel could be air, rail or road. For instance, if the employer has provided Rs 20,000 as LTA, but the employee spends Rs 15,000 on travel cost, then the exemption will be available only in respect of Rs 15,000.

The employee must maintain original proofs of expenses incurred, that is, tickets, boarding passes and bills, as the employer’s policy may require submission of proof of expenses. The exemption is for travel expenses and is not available for expenses on food, hotel stay and sight-seeing.

Amount of tax exemption: The amount of tax exemption depends on the mode of travel. The criteria for claiming exemption is as follows:

>> Journey is performed by air: Amount not exceeding the economy air fare of the national carrier.

>> Place of origin of journey and destination are connected by rail, and the journey is performed by any mode of transport other than by air: Amount not exceeding the air-conditioned first class rail fare.

>> Place of origin of journey and destination are not connected by rail and a recognised public transport system exists: Amount not exceeding the first class or deluxe class fare, on such transport.

>> Place of origin of journey and destination are not connected by rail and no recognised public transport system exists: Amount equivalent to the air conditioned first class rail fare for the same distance, as if the journey had been performed by rail.

An important point to note is that the exemption is available for the amount incurred by the shortest route to the place of destination. If the travel is for a circuitous route, then the exemption will be available for the farthest destination through the shortest route.

Timelines for claiming tax exemption: Exemption is available in respect of two journeys performed in a block of four calendar years. The current block runs from 2010 to 2013. If the exemption is not availed by an employee during such block, it can be availed in the first calendar year after the four year’s block.

LTA under the Direct Taxes Code: As per the Direct Tax Code, LTA exemption may not be available, but there is a popular demand to restore this beneficial provision.

To sum up: Employees who are planning a vacation with the family could review their compensation plan to ensure that LTA is paid to them by their employer. It’s a festival time and the tax exemption on LTA should certainly help you plan the much awaited vacation.

(The author is a director in KPMG. The views expressed are personal)

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