- Date : 27/02/2021
- Read: 6 mins
The Union Budget has introduced an innovative scheme to boost public spending by offering a combination of reimbursement and tax exemption. Read on to know more.
Reviving consumer spending has been one of the top priorities for the government to boost economic growth. According to World Bank statistics, salaried employees comprised 24% of Indian consumers. And Finance Minister Nirmala Sitharaman is keen to tap into this segment for generating demand.
The recently unveiled Union Budget 2021 included an innovative scheme to enable Central Government and private sector employees to claim tax benefits on unused Leave Travel Concession (LTC), subject to certain terms and conditions.
This proposal, which had been under discussion since late last year, is expected to benefit lakhs of employees in India who would otherwise have had to pay tax on unutilised LTC, while also generating demand worth Rs 28,000 crore.
What is the LTC Cash Voucher Scheme?
According to the latest LTC rules, Government and private sector employees can claim cash vouchers if LTC has not been availed of during the 4-year period between 2018 and 2021. However, in order to qualify, they would have to meet the following conditions:
Goods purchased must equal three times the LTC fare and leave encashment limit.
The goods would need to be purchased between 12 October 2020 and 31 March 2021.
A minimum of 12% GST should be applicable on the purchase price of the goods.
The vendor would need to have valid GST registration and the payment should have been made via digital mode such as credit card, netbanking or UPI.
What are some key things to remember while availing of the scheme?
- You do not have to travel in order to claim the LTC Cash Voucher Benefit under the scheme. It is meant to compensate employees who have been unable to travel during the lockdown while boosting consumption in the economy.
- While you are eligible for LTC for two trips during a 4-year period, cash voucher can be claimed only for one trip.
- To qualify for the benefit, you must avail of both LTC fare as well as leave encashment. But you do have the option of spending less than the minimum amount and still claim reimbursement, although on a pro rata (proportionate) basis.
- If you choose to only spend a portion of the total LTC amount, the benefit will be calculated proportionately. For example, if you are eligible for LTC worth Rs 2.1 lakh but only spend Rs 2 lakh, you would only be eligible for the benefit based on the actual amount spent.
- TDS will still be applicable on leave encashment, which will be displayed under the ‘Income from Salary’ head of the IT Return form. However, leave encashment is tax-exempt if you claim it on retirement or when leaving a job.
- You are also eligible to claim a cash advance of up to 100% of leave encashment and 50% of the value of estimated travel fare, as long as you submit proof of purchase (bills), confirming that goods equal to the amount claimed were purchased.
- If the cash advance is not utilised or utilised only partially, the amount paid is to be recovered either in full or to the extent of the unused amount, as the case may be. You would also have to pay interest by way of penalty, according to the guidelines of the Central Board of Direct Taxation.
- Claims should be settled within the current financial year if you want to be eligible for the benefit.
- You can purchase any type of goods or service as long as the GST is 12% or more.
- Purchases can be made on different dates until the end of the financial year. Multiple invoices are valid for the calculation of reimbursement benefit.
What does the scheme mean for private sector employees?
Interestingly, the LTC Cash Voucher Scheme was originally targeted at Government employees only. It was later expanded to also include employees working in private sector enterprises. This explains why the proposal has some key differences that apply only to private sector employees. For example, the LTC cash benefit is based on specific pay grades of Central Government employees. For private sector employees, the maximum amount has been capped at Rs 36,000 per person. So, a family of four would qualify for exemption on a total amount of Rs 1,44,000 (36,000x4).
If a private sector employee is not able to utilise the entire LTC amount, they will only be reimbursed up to 75% of the total limit. For example, if you are eligible for LTC worth Rs 80,000, you would need to spend Rs 2.4 lakh (Rs 80,000 x 3) to get the full exemption. If (say) you buy goods worth Rs 1.8 lakh, you would only get exemption on Rs 60,000 – that is, one-third of the amount you spend.
However, there are also certain grey areas in the proposal that need further clarification from the government. For example, private sector employers do not usually include LTC as a separate component of employee CTC; rather, it’s a fixed percentage that is included in the gross salary. The current proposal does not clarify how the LTC cash benefit is to be calculated in this case. Also, if LTC is not a part of your CTC as a private sector employee, you will not be eligible for the scheme.
Is it practical to spend money in order to reduce one’s tax liability?
The pandemic has caused many companies to lay off employees or impose salary cuts for survival. If you are in a relatively secure job and have enough funds to take care of your needs in the short-to-medium term, it may make sense to spend more in order to avail of the tax benefit. For example, those in government jobs are unlikely to face salary cuts or job losses and certainly stand to gain from this scheme.
What if you have opted for the new tax regime?
If you have gone with the new tax regime, you are not eligible for exemption under the LTC Cash Voucher Scheme. However, you do have the option to revert to the old scheme when filing tax returns, if you so wish. Should you stick to the old tax regime or move to the new one? Read this premium piece to get answers to all your queries?