What are the conditions to claiming I-T exemption on LTA?

The quantum of tax exemption is restricted to ‘actual travel expenses’ incurred on a journey/journeys

With the pandemic days travel restrictions lifted people are out with a vengeance picking destinations to spend quality time with their families, friends or even solo. The crowds thronging the airports are most telling of this trend. As leisure travel takes centre-stage, the salaried class of people are particularly keen to make the most of their entitled leave travel allowance (LTA) or concession (LTC), which are exempted from Income Tax, subject to certain conditions.

The incidence of tax on this is often debated in offices and in November last year even the Supreme Court offered some clarity in a judgement. In this second week of the fiscal year, it is a good time to explore the select aspects of LTA/LTC that are taxable or exempt from the levy.

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Prevalent I-T rule

The Section 10(5) of the Income Tax Act, 1961 specifically grants tax exemption to the value of leave travel concession received on domestic travels. Similarly, Rule 2B of the Income Tax Rules, 1962 prescribes certain conditions, including the quantum of exemption. Accordingly, the exemption is admissible on the value of any travel concession received or due to a taxpayer from his/her employer. The eligibility includes a former employee (post-retirement or pursuant to termination from service). Besides the taxpayer, the exemption includes the travel spend on his/her family members, covering spouse, two children, dependent parents, siblings, provided the travel is to any place within India.

The tax exemption can be availed only in respect of two travel instances occurring in a block of four calendar years, for example between 2018 and 2021 or 2022 and 2025. Further, if a taxpayer has not availed any such travel concession during the said 4-year block, then he will be allowed to ‘carry over’ to the immediate following block of four years. However, he can carry over only one such claim to the next block and it can be made only in the first year of that block. Say, in the 4-year block between 2018 and 2021, a taxpayer availed only one or no round of exemption. In the next block between 2022 and 2025, he can make only one additional claim and it has to be made in 2022 and no later.

Quantum of LTC eligible for exemption

The quantum of exemption is restricted to ‘actual travel expenses’ incurred on a journey/journeys. Thus, the exemption will be available only if the employee incurs such expenses on an actual basis as such or else the entire amount received will be taxable. Similarly, lump sum amount received based on self-declaration made by a taxpayer himself allowable ? No, as held in Dr. Reddy’s Laboratories Ltd. v. ITO (1996) 58 ITD 104 (Hyd. Trib.) self-declarations are not acceptable. Further, the Tribunal held that exemption should not exceed the expenses actually incurred.

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Further, the quantum of exemption is limited to, economy airfare, air-conditioned first-class train ticket, first class travel on other recognised public transport mode, all on the shortest route to the destination or actual amount spent (whichever is lower). In case no such recognised public transport - AC-first class rail fare assumes that the journey has been performed by rail.

It is important to note here that exemption is available only to air/train/bus fares and no other expenses (such as food, boarding, lodging or porter charges) will be allowed.

Cash received in lieu of LTA

Due to pandemic related travel restrictions, the Central Government has amended Section 10(5) and Rule 2B to allow similar exemptions in respect of cash allowance received in lieu of LTA. The said move is beneficial to those employees who were not able to avail of LTA in the block of 2018-21 as such. Accordingly, any such specified employee avails any cash allowance from his employer in lieu of LTA for himself or his family will get an exemption up to Rs 36,000 or one-third of the specified expenditure whichever is less, subject to certain conditions. The amended provisions are applicable from the assessment year beginning on April 1, 2021.

Exemption on foreign travel

In November 2022, a division bench of the Supreme Court held that LTA is meant for travel within India and is not applicable for foreign trips. Foreign travel frustrates the very basic purpose of LTA, which was intended to acquaint a civil servant or a government employee with the Indian culture. The legislature did not allow for employees to travel abroad, the pointed out. Thus, LTA benefits would not be available if the travel includes even a brief foreign leg.

Finally, the employee’s rank and position decides whether he or she is eligible for LTA. Generally, the organisation will seek inputs from such eligible employees to claim due deductions and add them to their Form 16. To claim a deduction and avoid future unforeseen tax litigations, it is advisable to preserve all the travel-related tickets, bills, and boarding passes, so taxpayer will be in a better position to place them before the concerned assessing officer later, if required.

(The writer is Founder & CEO, Shree Tax Chambers)