Taxability of Leave Travel Allowance (LTA) under Section 10(5) of Income Tax Act:
In Union Budget 2020, there has been no changes made in Leave Travel Allowance (LTA).
Leave Travel Allowance is one of the best tax saving tools that an employee can avail. It is a tax exemption offered by employers to their employees. Leave Travel Allowance as the name suggests is an allowance paid to the employee by the employer when the former is travelling with their family or alone. The amount paid as Leave Travel Allowance is tax free.
Section 10(5) of the Income Tax Act, 1961 with Rule 2B ensures the exemption of tax and also details the conditions subject to tax exemption. There are some rules related to the exemption of tax that is stated clearly under Section 10(5) of the Income Tax Act, 1961.
Though it is known that Leave Travel Allowance amount is exempted from tax, there are still doubts on the exemption. The exemption is restricted only to the travel cost incurred by the employee. The tax exemption is not valid for the costs incurred during the entire trip which might include expenses such as food expenses, shopping expense and other expense.The exemption is not available for more than two children of the individual born after October 01, 1998. Exemption is allowed for only two travels within a block of four years. The current block is between 2014-2017. If the individual doesn’t take advantage of the exemption within this block, they can carry it over to the next block.
Given below is a list of expenses that is exempted under Leave Travel Allowance
- Travel by air- Economic air fare by the shortest route or amount spent will be exempted depending on whichever is lesser.
- Travel by rail- A.C. first class fare by the shortest route or the amount spent on travel will be exempted depending on whichever is lesser.
- Place of origin and destination place of journey connected by rail but journey performed by other mode of transport
- Place of origin & destination not connected by rail(partly/fully) but connected by other recognised Public transport system
- Place of origin & destination not connected by rail(partly/fully) and not connected by other recognised Public transport system also
Providing Proof for LTA
Employers usually don’t have to submit proof of travel to tax authorities while assessing travel allowance claims. Even though it is not considered mandatory for employers to collect proof of travel from the employees, they still have the right to demand documentary proof if needed. The employee is advised to keep proof of their travel such as boarding passes, flight tickets, invoice of travel agent, duty pass and other documentary proof in case the assessing officer or the employer demands for it.
Calculation of Leave Travel Allowance
An employee can make LTA claim for two journeys in a block of four years. These block years are different from Financial Years and created by Income Tax Department. Currently, we are in the block year of 1st January 2014- 31st December 2017. In this block year, an employee can claim LTA for two journeys that have occurred during 2014-17, however, if the employee has not made any claims, then the exemption gets moved to the next year and not to the next block. Only the travel or ticket fare is considered for exemption, any expense incurred for the stay, food, sightseeing, etc. is not eligible for LTA.
How to claim LTA?
LTA is not a common part of the salary structure. Before you consider claiming for LTA, you are advised to check your pay structure. The LTA amount can vary from one employee to the other, however, if you are eligible for LTA, you will need to produce tickets/bills as per the criteria and submit the same to your employer. Every company will formally announce the dates for LTA claims, you will then need to fill in the applicable forms, attach the documents such as travel tickets, boarding pass etc., and send it out to your HR or accounts team. An employee will need to make the LTA claim before the employer makes the final calculation for tax liability.
Applicable LTA Deductions
Based on the salary structure, you can claim for LTA exemption only to a certain extent. The LTA can be claimed under the following circumstances:
Travel by air - When the destination is connected by air, the exemption is allowed for ticket fares of a national airline's economy class.
Travel by train - When the destination is also connected by train, the exemption is allowed for AC first-class tickets
Travel by other modes of transport - If the destination is not connected by air or rail, an amount equivalent to first-class, deluxe, or AC first-class fare, whichever is lower, can be claimed for exemption under LTA.
The LTA deductions will be considered only for the shortest route to the destination and back. If an employee is entitled to an LTA amount of Rs.30,000 but he/she has claimed only for Rs.20,000, the applicable LTA deduction will be for Rs.20,000 and the remaining Rs.10,000 will be added to your income which will be accountable for tax liability.
Tax Rebate on LTA
In instances where you are not able to make the LTA claim within the year, you can move it to the next year. However, LTA exemption is not part of the Income Tax Return filing. Your employer will certify your LTA claim and add it to form 16.
There are certain restrictions when it comes to Leave Travel Allowance. Given below are the important restrictions applicable on Leave Travel Allowance.
- The Leave Travel Allowance is applicable only for travel expenses
- The individual can travel only with India
- The individual has to keep proof of travel as it can be required for tax auditing purposes
- The exemption under Leave Travel Allowance is not available for more than two children born after October 1, 1998
- One can claim LTA only twice in a block of four years
- If LTA isn’t claimed in a particular block, it can be carried over to the next block and used in the first year of the next block itself.
- LTA exemption offers cover for the family of the individual too. A family, under LTA, includes immediate family which is the parents, siblings, spouse, and children.
Consider an example where Mr. Anand is provided LTA of Rs.25,000 by his employer but Anand spends only Rs. 20,000 on the travel cost, then the exemption is limited to only Rs. 20,000 since the exemption is only valid for travel expenses and not other expenses such as food expense or accommodation expense.
Given below are the travel limitations applicable under Leave Travel Allowance.
- Leave Travel Allowance covers only domestic travel and does not cover international travel
- The mode of travel should be either air travel, railway or public mode of transport
The LTA benefit is not entitled to all the employees, based on various factors such as grade, pay-scale, etc. an employer decides whether a certain amount can be allocated for LTA. In order to be eligible for the LTA, the employee should take leave and travel, the LTA is provided for travel within India where it is a round-trip with or without family members.
Benefits of Leave Travel Allowance
Leave Travel Allowance (LTA) is one of the important components of the salary structure that helps in saving income tax. LTA can be claimed for travel fare or tickets within India only, expenses incurred for accommodation, or any other fee will not be eligible for exemption. An employee can produce his/her travel-related bills for the journey through air, train, bus or any other mode of transport and save on taxable income. LTA is added to the salary structure by the employer based on various factors such as title, position, pay scale, etc. The LTA benefits can be availed only if it is a part of the salary structure. You can claim for the LTA when you have traveled alone or when with family as well. LTA covers the travel expenses for family members - parents, siblings, spouse, and children as well, provided you have traveled with them on those occasions.
Documents required for claiming LTA
To claim for LTA, an employee is required to submit the LTA form along with the travel bills. Though the IT Department or the employer are not required to check the tickets or bills, it is recommended to preserve the tickets, boarding pass, and other documents, so it can be provided to the LTA claim assessing officer if required.
FAQ's about Leave Travel Allowance
- What exactly does Leave Travel Allowance cover?
- Who does it offer cover for?
- How many times can an individual claim Leave Travel Allowance?
- Is international travel permitted under Leave Travel Allowance?
- Can Leave travel Allowance be carried forward?
Leave Travel Allowance covers only the travel expense incurred during the travel.
It covers the travel expenses incurred by the individual and their immediate family. Relatives are not considered family under Leave Travel Allowance.
One can make a claim only twice in a block of four years.
No, international travel is not covered.
LTA can be carried forward to the next block if it is not utilised for the current block.
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