Finance Bill, 2021 has amended the provisions of Income Tax Act, 1961 to provide for an exemption from LTA received by employees from their employer in lieu of actual travel and after availing the LTC Cash Voucher Scheme introduced by the government in October 2020.
The LTC cash voucher scheme is introduced by the government in order to boost consumption in lieu of actual travel.
Readers are aware that income-tax exemption on LTA paid to employees including private-sector employees is available only if the employee actually travels in India and produces the corresponding documentary proof of travel. In case an employee does not travel in India then he cannot claim any income tax exemption from the LTA even if his employer has paid the LTA to him. In this case, LTA received from the employer will be fully taxable since this LTA is received without actual travel.
Earlier, on October 12, the government announced the LTC Cash Voucher Scheme. According to which any central government employee can avail this scheme by 31 March 2021 by purchasing goods or services with GST of 12% or more.
However, in this pandemic travelling has become riskier, and hence the benefit of the income-tax exemption on LTA is extended to employees without travelling.
The tax exemption from LTA without actual travel by employees is given with certain conditions and if the employees fulfil certain criteria. These conditions and criteria are specified in a scheme called LTC Cash Voucher Scheme.
In this scheme, all the employees are eligible to receive an equivalent amount of their eligible LTC/LTA fare as a cash payout for spending such amount on purchase of specified goods and services to make such LTA exempt from tax.
This exemption from LTA was allowed by way of a press release dated 29.10.2020. The legislative amendment for provisioning income-tax exemption under LTA Cash Voucher Scheme is now made through Finance Bill, 2021.
Clause 5 of the Finance Bill, 2021 contains the necessary amendments for providing the exemption. It has amended section 10(5) of the Income Tax Act, 1961 in the following manner:
(b) in clause (5),––
(i) after the proviso and before the Explanation, the following proviso shall be inserted, namely:––
“Provided further that for the assessment year beginning on the 1st day of April, 2021, the value in lieu of any travel concession or assistance received by, or due to, such individual shall also be exempt under this clause subject to the fulfillment of such conditions (including the condition of incurring such amount of such expenditure within such period), as may be prescribed.”;
(ii) the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted, namely:––
“Explanation 2.—For the removal of doubts, it is hereby clarified that where an individual claims exemption and the exemption is allowed under the second proviso in connection with the prescribed expenditure, no exemption shall be allowed under this clause in respect of such prescribed expenditure to any other individual.”;
Clause (5) of the said section provides for exemption in respect of the value of travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding on leave to any place in India.
It is proposed to insert a second proviso in the said clause so as to provide that for the assessment year beginning on the 1st day of April, 2021, in the case of an individual, the value in lieu of any travel concession or assistance received by, or due to, such individual shall also be exempted, subject to fulfillment of such conditions (including the condition of incurring such amount of such expenditure within such period), as may be provided by rules.
It is further proposed to insert Explanation 2 so as to clarify that where an individual claims such exemption and the same is allowed under the second proviso in connection with the expenditure provided by rules, no exemption shall be allowed under the said clause in respect of the same expenditure to any other individual.
These amendments will take effect from 1st April, 2021.
Stated Objectives in the Memorandum Explaining the Provisions of the Finance Bill, 2021 are reproduced below:
Exemption for LTC Cash Scheme
Under the existing provisions of the Act, clause (5) of section 10 of the Act provides for exemption in respect of the value of travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding on leave to any place in India. In view of the situation arising out of outbreak of COVID pandemic, it is proposed to provide tax exemption to cash allowance in lieu of LTC.
Hence, it is proposed to insert second proviso in clause 5 of section 10, so as to provide that, for the assessment year beginning on the 1st day of April, 2021, the value in lieu of any travel concession or assistance received by, or due to, an individual shall also be exempt under this clause subject to fulfilment of conditions to be prescribed. It is also proposed to clarify by way of an Explanation that where an individual claims and is allowed exemption under the second proviso in connection with prescribed expenditure, no exemption shall be allowed under this clause in respect of same prescribed expenditure to any other individual.
The conditions for this purpose shall be prescribed in the Income-tax Rules in due course and shall, inter alia, be as under:
(a) The employee exercises an option for the deemed LTC fare in lieu of the applicable LTC in the Block year 2018-21;
(b) ‘specified expenditure’ means expenditure incurred by an individual or a member of his family during the specified period on goods or services which are liable to tax at an aggregate rate of twelve per cent or above under various GST laws and goods are purchased or services procured from GST registered vendors/service providers;
(c) ‘specified period’ means the period commencing from 12th day of October, 2020 and ending on 31st day of March, 2021;
(d) the amount of exemption shall not exceed thirty-six thousand rupees per person or one-third of specified expenditure, whichever is less;
(e) the payment to GST registered vendor/service provider is made by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under Rule 6ABBA and tax invoice is obtained from such vendor/service provider;
(f) If the amount received by, or due to an individual as per the terms of his employment, from his employer in relation to himself and his family, for the LTC is more than what is allowable to such person under the above-discussed provisions, the exemption under the proposed amendment would be available only to the extent of exemption admissible under above listed provisions.
This amendment will take effect from 1st April, 2021 and will, apply in relation to the assessment year 2021-2022 only.
Note: The amendment has not specified the period in which such expenditure is required to be made for availing the LTA exemption but the LTC Cash Voucher Scheme introduced by the Government has set the period of incurring the expenditure from 12th October 2020 to 31st March 2021. The objectives as stated in the Memorandum has clearly stated that this LTA exemption in lieu of actual travel is available for AY 2021-22 only and not in perpetuity. This exemption is introduced only as a relief to employees amid COVID-19 pandemic.
The legislative coding does not make any reference to LTC Cash Voucher Scheme for claiming the exemption but provisions state that such amount of expenditure is required to be incurred in accordance with the rules to be framed in this regard.
Read the following articles on LTC Cash Voucher Scheme
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Is LTC Cash Voucher Scheme Beneficial for Private Sector Employees
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