The latest announcement by the government on LTC has been a talking point mostly among organised sector employees as everyone wants to understand how the scheme really works, if they are eligible for it or if they should go for it. We tell you all the details to make an informed decision:
How the scheme works
Given the lockdown restrictions due to pandemic the chances of utilising travel and subsequent re-imbursement on account of LTC this year are increasingly getting diminished. To boost the consumption and offer an alternative to the employees, the government has come up with special cash package in lieu of the LTC.
"Under LTC Cash Voucher Scheme Central government employees can opt to receive cash in lieu of LTC during the block period of 2018-21 equal to the amount of leave encashment plus fare, provided employee spends a sum equivalent to leave encashment and spends a sum three times of the value of the fare as prescribed in the said scheme," says Kapil Rana, Founder & Chairman, HostBooks Ltd.
This purchase needs to be only for goods and services that have GST rate of 12 per cent and more. Government employees will get up to 50 per cent of travel fare and 100 per cent of the leave encashment amount as an advance which they have to spend before March 31, 2021. Once they submit the proof of purchase as GST invoices of the goods and service purchases they will get the balance amount. It is necessary for this purchase to be done through a digital mode, not in cash.
While there is no tax benefit on the leave encashment amount, LTC enjoys exemption so the cash package will also enjoy similar tax exemption. "Broadly, in this case, the amount represents the cash reimbursement of LTC fare in lieu of deemed actual travel and the same shall be allowed as an exemption as per the existing provision of LTC fare. Therefore, TDS is not applicable to such reimbursement," says Rana of HostBooks Ltd.
Benefits depend on travel fare eligibility and number of family members
The first criteria that will determine the LTC cash voucher benefit is eligibility of the travel fare for a round trip by one person. Currently there are three slabs of Rs 6000, Rs 20,000 and Rs 36,000. So, the higher your salary, the higher will be the eligibility slab and more you will need to spend on goods and services to get the total LTC benefit.
Government employees are eligible to take LTC travel fare amount for all members of the family including spouse, two children, dependent parents and siblings. So higher the number of family members higher will be the eligibility amount, and thus you will have to spend much higher on goods and services. It could go well beyond Rs 4 lakh if you are not in the lowest travel benefit level.
In such a scenario unless you are planning to have a big-ticket purchase like car, it will be challenging to utilise the full amount of benefit. The lower you spend the higher will be the losses.
In the above example, the total eligible benefit including travel fare and leave encashment is Rs 1.51 lakh, but the total expense required to claim this benefit is Rs 3.91 lakh. Even if you spend Rs 1.5 lakh you would incur a loss of Rs 93,225 on your eligible benefits.
Different appeal based on your past travel
LTC benefit is required to be availed by the employee within a block of four years. The current block is from January 1, 2018 to December 31, 2021. This is almost the end of the third year of the four-year block. If you have already exhausted the quota of two travels during 2018-2020 (till March) then there is nothing for you in this scheme. However, the employees who did not make any travel for availing LTC during 2018 and 2019 and before lockdown in 2020 will be more compelled to go for this scheme as it may be difficult to make two travels between now and December 2021.
"Due to COVID-19 pandemic, it is practically impossible to fulfill the conditions, so employees will not be able to take the benefit of the same in respect of the current block. Therefore, to provide a window to avail the benefit and to overcome the current cash flow situation, the cash voucher scheme has been launched," says Rana of HostBooks Ltd.
If you have not utilised LTC for even one travel so far in the current block of four years, your choices are limited given the low probability of travel till December this year. You can utilise only one travel in 2021 which will put the risk of not being able to utilise the second LTC benefit. In such a situation, you will be better off if you go for this scheme and make the purchase in 2020 as it will still give you the possibility of utilising second LTC in 2021.
However, you will have greater flexibility if you have made at least one eligible travel and were waiting for the second. In this scenario you will have to analyse your options. You can decide based on your preference between the need for a big-ticket purchase or feasibility of a travel till December 2021. If you were already planning a big-ticket purchase then you have all the more reason to go for it.
For people who do not have any plan to go for big ticket purchase may rather skip this scheme and prefer to utilise this money on possible future travel. However, people who were already considering some big-ticket expenses either on goods or services, this offer presents a good opportunity to claim tax-free LTC and leave encashment amount.
In case you don't want a big-ticket purchase, you can also go for many small to medium size purchases depending on your needs as you have time till March 31, 2021.
PSU/PSB and private employees will have to wait
Although the early indication was that the benefit of LTC scheme may be offered to all PSU, PSB employees and private sector employees may also get tax-saving opportunity to make good the lost opportunity of utilising the LTA this year, so far there is no government notification to offer such facility to them. The notification which the government has issued so far is limited to government employees.
"The PPT (Power Point Presentation) issued by the ministry has provided that employees of PSBs and PSUs will also be allowed this facility. Since the office memorandum prevails over PPT, it can be concluded that such a package will apply to Central government employees only," says Naveen Wadhwa, DGM, Taxmann.
So unless there is further notification or amendment in the tax laws, which may happen in near future, this scheme remains limited to government employees only.
"The order has further provided that the legislative amendments to the provisions of the Income-tax Act shall be proposed in the due course. The said PPT has provided that tax concession will be allowed for state government/private sector too, for employees who currently are entitled to LTC, subject to the guidelines of the Central government scheme. Thus, we have to wait for such amendment notification to get more clarity on the taxability aspect," says Wadhwa, of Taxmann.
For majority of private sector employees, the LTC is part of their salary and it is looked mostly as an option to save income tax that too only for two years in the block of four years. Since it is not an additional income, you have to decide its merit only from the point of view of tax saving and need for big-ticket purchase if the government notifies its applicability for the private sector.