Should you opt for the LTC cash voucher scheme? Here's how much tax you will save

On October 12, 2020, the government announced an LTC cash voucher scheme that will allow government employees to purchase goods and services in lieu of the tax-exempt portion of the Leave Travel Concession/Leave Travel Allowance (LTA/LTC). This voucher is especially beneficial for someone who wants to claim LTC without actually undertaking a trip. (Tax exemption on LTC is available on two journeys in a block of four years.)

As per the announcement, an employee can claim tax-exemption on the travel fare encashed if the amount is spent by satisfying specified conditions. One can avail this scheme till March 31, 2021. The government has brought out legislative amendment in the Income-tax Act, 1961 via Budget 2021.

Read on to find out how much you stand to gain by opting for the LTC cash voucher. This story will tell you about the rules of availing the LTC benefit and compare it to the conditions specified under the voucher. Further, we will tell you if you should indeed opt for this scheme.

Specified conditions under govt's LTC cash voucher scheme
As per the announcement made by the finance minister Nirmala Sitharaman, the money availed in lieu of travel fare under LTC cash voucher scheme will be tax-exempt if the following conditions are satisfied:

• Buy goods/services worth three times the amount of fare/LTA received;
• The money on goods/services must be spent before March 31, 2021;
• The money must be spent on goods attracting GST of 12 per cent or more from a GST registered vendor;
• The payment must be made via digital mode;
• GST invoice will be required to be produced to claim the tax-exemption.

The scheme is available to central government employees. The tax department via a press release dated October 29, 2020, extended the scheme to state government employees, private sector employees, PSBs and PSUs employees, provided they follow the scheme guidelines mentioned above. Typically, private sector employees do not get leave encashment at the time of taking leave for travel.

Further, central government employees are eligible to receive 10 days of leave encashment (basic plus DA) under the scheme. An equivalent amount has to be spent that is received from leave encashment.

According to a Times of India news report, here's how the scheme will work: "If your LTA is Rs 1 lakh for the current financial year, you either produce tickets to claim it as a tax-free allowance or pay Rs 30,000 tax on it. Now, the government is offering you a window where you can avoid paying Rs 30,000 without going on a vacation to Goa or Kerala - provided you spend Rs 3 lakh to purchase a car, laptop, TV set, fridge, smartphones or a combination of these items which attract over 12% GST. Among services, term insurance premium, and even Ulips, would qualify given that they face 18 per cent levy."

Rules for claiming tax-break on LTC
LTA/LTC is a tax break that can be availed by an employee for travel of self and family members anywhere in India. The leave encashment portion is taxable in the hands of an employee.

The amount of LTA that can be claimed as tax-exempt is limited to the actual fare of rail/air/bus travel. Abhishek Soni, CEO & founder, Tax2win.in, an ITR filing website says, "No other expenditure such as hotel bills, local conveyance, sight-seeing etc are covered under the tax-exempt portion of LTA."

The tax break on LTA can be claimed on two journeys in a block of four years. The block of four years is a calendar year. The current block of LTA is between January 1, 2018, and December 31, 2021. The next block of four-year period will start from January 1, 2022 and end on December 31, 2025.

Income tax rules allow an employee to carry forward one out of the two permitted travels from the previous block of four years to the next one. However, in case of carry forward, the tax-exemption for such travel can be availed only if the travel has been made in the first year of the block of the next year.

As per EY, "It may be noted that LTC is required to be availed of by government employees by availing of leave and undertaking travel, failing which, it lapses. In contrast, LTC is usually a component of overall "cost-to-company" package for employees in the private sector and it is paid as taxable allowance if not availed of by the employee by going on leave and undertaking travel. Hence, the exact connotation of the condition of spending three times the amount of the fare component will be keenly awaited by employees."

How much tax is saved by opting for cash voucher scheme?
As mentioned above, under the new scheme, one has to spend three times the equivalent money on goods/services attracting 12 per cent or more GST from a GST registered vendor. This means that if the amount of LTA available to you is Rs 15,000, then to claim the entire portion as tax-exempt, you will be required to spend Rs 45,000 (i.e.,3 times of Rs 15,000). So, someone in the highest tax bracket (30 per cent) will save Rs 4,680 (inclusive of cess) by opting for the scheme.

If someone has not availed even a single journey, then in such a case, opting for this scheme will result in tax savings.
However, in the current block of 2018-2021, if only one travel journey is availed. Here, you have the option of carrying forward the second permitted travel to the next block, i.e., between January 1, 2022, and December 31, 2025.

Soni says, "To avail the tax-break, you will be required to travel in the calendar year of 2022. Further, the tax-break will be available in the financial year depending on the month in which the travel is made. For instance, if you travel between January and March 2022, then tax-break can be claimed in the financial year 2021-22. If the travel is made between April and December 2022, then tax-break will be available in the financial year 2022-2023."

As per the office memorandum issued by the central government for its employees, the working will be as follows:
Pay of an employee Rs 1,38,500 and has a family of 4 eligible for economy class air travel.

• Leave Encashment = (1,38,500 x1.7) x10/30 = Rs 54, 015
• Fare Value (As entitled): Rs 20,000 x4 = Rs 80,000
• Total value = Rs 1,34,015 (Rs 80,000 + 54, 015)
• Amount to be spent by central government employee for full cash benefit: 54,015 + 240000 (3 x 80,000) = 2,94,015

What should you do?
Once the pandemic subsides and a vaccine is available, people may be able to travel for tourism purposes more freely. However, given the current collapse of the tourism and airline industries it is likely that the cost of tourism may go up substantially post the pandemic. The cost may also go up due to the precautions that may still need to be taken e.g. sanitisation etc. Therefore, the cost of travel may well be much higher than earlier, and your LTA could get fully used in the tax-exempt form. However, remember that LTA can be claimed only for domestic travel and subject to conditions therefore you must evaluate whether you will be able to claim it or not.

However, it must be noted that the items on which expenditure would qualify for this scheme also include many items which would anyway have been bought by people due to necessity. Some of these items include cell phones, washing machines, refrigerator, laptops, iPads etc., which helps to meet the needs of work from home or helping your child study from home, Also, due to upcoming festive season, many e-commerce companies are coming out with discounts that might help you a lot to buy these goods at a lower price.

So, should you opt for the scheme? Financial planner, Surya Bhatia, in the Times of India news report mentioned above said that you shouldn't claim (opt for this) for the heck of claiming the Rs 30,000. "If you have expenses planned for the remaining six months this year then you can use it to your advantage," he added.