Know how to utilise your LTA and enjoy tax break

Taxing Issues

The posters of ‘Incredible India’ are always enticing. We all wish to take a break from the mundane everyday life and go on a vacation with our families, but the expenditure involved forces us to keep our plans on the back burner. Your salary package may be providing you for a leave travel allowance (LTA) and you ease this financial worry by claiming it for this travel and enjoy the tax benefits also.

LTA – purpose: LTA is paid to employees to meet the cost of domestic travel with family to any place in India. In some organizations, LTA is granted over and above the regular pay, while in most others, it forms part of the cost to company of the employee.

Tax benefits: Once an employee has incurred a domestic travel, he can submit a reimbursement claim with the employer. The amount so reimbursed by the employer can be claimed as exempt under section 10(5) of the Income-tax Act, 1961 (‘IT Act’) if the following conditions are satisfied:

>> The travel is within India and the travel expenditure is for self, spouse, children, dependent parents and dependent siblings. Expenses such as hotel room costs, sightseeing, food, etc, do not qualify for the exemption.

>> Tax exemption is available on the applicable fare for the shortest route to the place of destination. Depending on the mode of travel, limits specified are as under:

1) In case travel is by air: Economy air fare on national carrier on shortest route.

2) If destinations are connected by rail: First AC rail fare by shortest route.

3) If destinations are not connected by rail: First class or deluxe class fare, where recognised public transport system exists, otherwise first AC rail fare for the equivalent distance.

>> Tax exemption is available twice in a block of four calendar years. The current block being 2010-2013.

What if an employee fails to avail tax exemption in the specified block? If an employee has not claimed the benefit during any specified block, the benefit of one trip can be carried over to the first calendar year in the immediately following block (2014 – 2017). This is in addition to the two eligible exemptions in that particular block. For example, if for certain reasons Mr. Sareen could not plan a vacation in the block 2010-2013, he may still carry forward one trip and claim the tax exemption in the first calendar year in the next block, that is 2014.

LTA under the Direct Tax Code (DTC): As per the Direct Tax Code bill tabled in the Parliament, LTA exemption may not be available but there is a popular demand to restore this beneficial provision.

What happens if employee fails to submit the bills with the employer? It is possible that the employee has not availed the amount that is there in the salary package. In such case, most employers pay the entire amount as ex-gratia after deducting taxes.

To sum up: With above tax-friendly provisions, it may be a good idea to pack your bags and take your family on a vacation. The travel costs are high but tax saving on the total cost would reduce some burden and help you in enjoying your vacation.

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

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