Section 10(5) of the Income Tax Act, 1961 (along with Rule 2B of the Income Tax Rules) governs calculation of tax exemption on LTA. Each year organizations face significant difficulty while calculating tax exemption on LTA when they carry out the year-end tax compliance work. Following are thelegal provisions, issues and suggestionsfor calculation of LTA exemption.
Legal Provisions-
1) LTA extended by an employer to an employee for himself or his family for going anywhere in India in connection with his proceedings for leave or proceedings to any place in India after retirement or termination of his service, is exempt from tax in the hands of employee as per following.
• If journey is performed by Air –Economy class fare of the national carrier( Air India) by shortest route or the amount spent whichever is less.
• If journey by Rail – AC First class fare by shortest route or the amount spent whichever is less.
• Where places of origin of Journey and destination are connected by rail & journey is performed by any other mode of transport- AC First class fare by shortest route or the amount spent whichever is less.
• Where places of origin of Journey and destination are not connected by rail,
a) Recognized public transport exists- First class or deluxe class fare by the shortest route or the amount spent, whichever is less.
b) No recognized public transport exists - AC First class rail fare by
Shortest route or the amount spent whichever is less.
2) The term Family includes – Spouse and children of the employee (not more than two surviving children born after October 1998). It also includes parents, brothers, sisters who are wholly or mainly dependant on the employee. The child includes step child and adopted child.
3) The exemption is available only for two completed journeys in block of 4 calendar years. The latest block is started from 1st Jan 2014 to 31st Dec 2017.
4) Exemption is based on actual expenditure - The quantum of expenditure is limited to the actual expenses incurred on the journey. In other words, without performing any journey and incurring expenses thereon, no exemption can beclaimed.
5) Exemption is available only in respect of air fare, rail fare and bus fare. No exemption will be available in case of other expenses like scooter, taxi, porter age expenses during journey and lodging and boarding.
6) Fixed Allowance is not subject to exemption.
7) Exemption will not be available if family members are travelling separately without the employee who is not on leave.
Issues –
1) As per Salary TDS circular No. 08/2013 dated 10th October 2013, the Income Tax Department has specified that employers need to collect and scrutinize the proof of travel (ticket etc.) before granting tax exemption. The relevant excerpt from the Income Tax Department circular is as follows.
Obligation of the employer –The employer has to satisfy the obligation that leave travel
(fare) concession is not taxable in view of section 10(5) the employer is not only required to
be satisfied about the provisions of the said clause but also to keep and preserve evidence in
support thereof.
Thus all the employers should now collect proof of travel from employees if they wish to grant tax exemption on LTA.
2) LTA should be uniform to allthe employees.
3) The basic rule is that quantum of exemption will be limited to the actual expenses incurred on the journey which in turn is strictly limited to expenses on air fare, rail fare and bus fare only. No other expenses like local conveyance, sight-seeing expense etc., shall qualify for exemption.
4) Any Leave encashed for the purpose of Leave travel or home travel concession is taxable.
5) Foreign Travel – The exemption is not available in case of Foreign Travel
6) The Exemption is not available to more than 2 surviving children of an individual born after 1.10.1998. However, this restriction is not there in respect of children born before 1.10.1998.
7) Where the journey is performed in a circuitous route, the exemption is limited to what is admissible by the shortest route. Likewise, where the journey is performed in a circular form touching different places, the exemption is limited to what is admissible for the journey from the place of origin to the farthest point reached in India, by the shortest route.
However in practical scenario when employees travel to multiple destinations, it may not be easy to determine the farthest place by compliancepersonnel.
For example, let us assume that an employee who works in a Pune based company visits many places in india on leave travel. It may not be easy for the compliance personnel sitting in Pune to determine accurately the farthest place. Also, determining the farthest place can be arduous and time consuming if there are many employees who do circuitous leave travel.
8) When an employee visits places which are not connected by train, employers may find it difficult to get details regarding public transport in the areas visited by the employee in order to calculate tax exemption.
9) Calculating equivalent First AC train fare can be time consuming, particularly when an employee travels with his family.
10) If an employee travels in the early part of the year, the First A/C train fare or air fare at the time of travel may not be the same as that towards the end of the year when employers calculate tax exemption. If there is a change in train fare towards the end of the year, employers may not find it easy to locate the train/air fares which were in effect at the time of the employee’s travel
Suggestions-
1) LTA is exempt twice in a block of four calendar years. Thus LTA period for reimbursement and claim needs to be fixed as January to December (calendar year) and should not be April to March (financial year) for compliance& convenience purpose.
2) HR needs to fix the uniform LTA to allemployees. The reimbursement needs to be made on the basis of actual claim subject to limit available to each employee.
3) Employer needs tokeep the track of two completed journeys in block of four calendar years with respect to each employee. Employer also needs to maintain &preserve the bills and details of journey performed by the employees.
4) Employer needs to verify the bills with all the details and then process the payment.
5)The exemption will be available only if employee is travelling along with his family members. Thus employee needs to take leave. This will reduce liability on account of leave encashment.
6) Following Travel Proof are required
In case of air travel, air ticket and boarding passes.
In case of train travel, the train ticket.
In case of travel by taxi, the taxi bill should contain the name of the employee, details of the places visited, distance covered and date of travel.
7) If an employee travels with family, the details of the family members (name, relationship and age) should be submitted to Employer. The employee should submit a declaration that his parents, brothers and sisters — whose travel expenses are to be included for tax exemption– is wholly dependent on him.
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