EY Tax Alert CBDT extends tax exemption for LTC Cash Voucher Scheme to non-central government employees
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31 October 2020
EY Tax Alert
CBDT extends tax exemption for
LTC Cash Voucher Scheme to non-
central government employees
Tax Alerts cover significant Executive summary
tax news, developments and
changes in legislation that This Tax Alert explains the press release dated 29 October 2020 (Press Release) issued
affect Indian businesses. They by the Central Board of Direct Taxes (CBDT)1, extending the LTC Cash Voucher Scheme
(Scheme) to non-central government (CG) employees. The Finance Minister (FM) had
act as technical summaries to announced this Scheme for all employees on 12 October 20202. However, the CG had,
keep you on top of the latest tax until now, issued specific instructions for its implementation restricted to CG
employees only.
issues. For more information,
please contact your EY advisor. The current Press Release now extends similar benefits to non-CG employees as well
and enumerates the conditions to be satisfied by such employees in order to avail of
the benefits of the Scheme.
The Press Release announces tax exemption for deemed Leave Travel Concession
(LTC) fare up to INR36,000 per person for a round trip, subject to fulfilment of the
conditions stated in the Press Release. Furthermore, the clarifications already issued3
in context of CG employees would equally apply to non-CG employees also.
[1]
Apex administrative body for direct taxes in India
[2]
Refer our Flash News dated 12 October 2020, “Finance Minister announces tax exemption for “The Scheme” for salaried
taxpayers to boost consumer demand” on the proposed Scheme”
[3]
Office Memorandum (F.No.12(2)/2020 - EII(A) dated 12 October 2020 and Office Memorandum (No.12(2)/2020- E.II(A) dated
20 October 2020encashment on or before 31 March
Background 2021.
► Existing provisions for LTC exemption under the ▪ The money must be spent on goods
Income Tax Laws (ITL) attracting Goods and Service Tax (GST)
of 12% or more from a GST-registered
• As per the provisions of the ITL, salaried vendor.
taxpayers (both government and private
sector employees) are entitled to an ▪ The payment must be made through
exemption on (LTC)/assistance to the extent digital mode and employee must
of expenditure incurred in relation to travel produce GST invoice.
within India, subject to compliance of
conditions prescribed in the Income Tax
• The FM further announced that the Scheme
Rules, 1962 (Rules).
will also apply to employees of public sector
banks, public sector units and state
• The exemption is available for two journeys in government/private sector, who currently
a block of four calendar years, starting from are entitled to LTC, subject to compliance
1986 (current block being years 2018-21). with the guidelines of the Scheme for CG
employees.
• Taxpayers are entitled to exemption for air
fare/railway fare for employees and their ► Operationalization of the Scheme for CG
family members, as per the limits prescribed employees
in the Rules4.
Office Memorandum (OM) dated 12 October 2020
► Relief introduced by the FM due to the COVID-19
pandemic • To implement the Scheme for CG employees,
the CG issued an OM dated 12 October which
• Due to the COVID-19 pandemic and the set out the parameters of the Scheme in
consequential nationwide lockdown, there detail and provided instructions to Drawing
has been a disruption in the transportation and Disbursement Officers (DDOs).
and hospitality sectors. Accordingly,
employees have been unable to avail of LTC • Amongst others, the OM clarified the
in the current block of 2018-21. following aspects:
• In this backdrop, through an earlier press ▪ The deemed LTC fare per person for a
release dated 12 October 20205 and a power round trip will be INR6,000/20,000/
point presentation run at the press 36,000 depending upon entitlement of
conference, the FM had announced the the employee to rail fare, economy air
introduction of the Scheme for CG employees fare or business class air fare as per
in lieu of one LTC in the present block of four their designation.
years, to boost consumer demand in the
economy.
▪ The leave encashment component will
be fully taxable but deemed LTC fare
• The Scheme provides that, in lieu of one LTC will be exempt on the lines of the
in the present block of four calendar years, existing exemption for LTC fare. The
cash payment will be made to employees for: legislative amendment to the ITL for this
purpose will be moved in due course.
▪ Leave encashment Hence, tax is not required to be
deducted on the reimbursement of the
▪ Payment of the fare in three flat-rate deemed LTC fare.
slabs, depending on the class of
entitlement (deemed LTC fare) ▪ Where the amount spent by an
employee falls short of the three times
• As per the Scheme, leave encashment will be of the deemed LTC fare on specified
taxable, while deemed LTC fare will be expenditure during the specified period,
exempt. the tax exemption will be restricted to
pro rata amount of the shortfall of LTC
• CG employees opting for the Scheme will be fare and excess LTC fare received by an
required to fulfil the following conditions to
be entitled to the exemption under the ITL:
▪ Buy goods/services worth three times
the fare and avail one-time leave
4 5
Refer Rule 2B of the Rules for detailed conditions specified Refer our Flash News dated 12 October 2020, “Finance Minister announces tax exemption for “The Scheme” for salaried
therein taxpayers to boost consumer demand” on the proposed Scheme”employee, if any, should be refunded to answers/clarifications to the queries in an
the employer6. FAQ format. The FAQs clarified the following
aspects:
▪ DDOs can make reimbursement under
the Scheme as per the above details on • An individual (employee) need not take
receipt of invoices of purchases leave for availing the Scheme, nor
made/services availed post the issuance undertake any travel. It is a scheme in
of the OM from employees who are lieu of LTC travel.
desirous of availing of the Scheme. CG
employees should opt for both leave • The Scheme is applicable to the LTC
encashment and deemed LTC fare. fare unutilized during the block period
of 2018-21. So, it will not apply to LTC
▪ Employees can avail of an advance up to fare which has already been utilized till
100% of leave encashment and 50% of 12 October 2020.
deemed LTC fare, to be settled on
production of receipts for eligible • If an employee has already exhausted
goods/services. The claims under this leave entitlement, they can still avail the
Scheme (with or without advance) are to Scheme for LTC fare without leave
be made and settled within the current encashment. The expenditure should be
tax year (i.e., from 12 October 2020 to three times the LTC fare.
31 March 2021).
• If an employee avails of an advance
▪ Non-utilization/under-utilization of amount and spends it but does not
advance to be accounted for by DDOs in spend three times the LTC fare, the
accordance with the extant provisions advance drawn will be treated as
relating to LTC advance i.e., immediate underutilized and pro rata amount will
recovery of full advance in case of non- be recovered from the employee.
utilization and recovery of unutilized
portion of advance with penal interest. • Newly-joined CG employees who are
entitled to three hometown journeys
Press release dated 13 October 2020 to clear and one journey anywhere in India in a
misconception block of four years, may use any one of
the LTC available in the block period.
• In response to criticism of the Scheme
appearing in a press article which suggested • There are special packages of eligibility
that employees will be better off paying taxes to travel by air to places like Andaman &
on the LTC amount availed, the CG issued Nicobar, Jammu & Kashmir and the
another press release dated 13 October Northeast under “anywhere in India
2020 to clarify certain misconceptions. fare” for all CG employees. But, the
Amongst others, the press release clarified deemed LTC fare of
that LTC for government employees is quite INR6,000/20,000/36,000 has been
different from Leave Travel Allowance (LTA) calculated based on the normal
in the corporate sector. eligibility of an employee and the special
packages would not be applicable to this
• Government employees claiming LTC are not Scheme.
eligible for LTC unless they actually travel. If
they fail to travel, the amount is deducted • Multiple bills for different purchases will
from their pay and they may be liable for be accepted from employees. But, the
disciplinary action. They do not have the purchase should be done from 12
option of keeping the money and paying tax. October 2020 to 31 March 2021,
Thus, government employees have only two should carry GST of 12% or more and
choices: (a.) Travel and spend (and payment should be made in digital
incidentals like hotel, food etc., are to be mode.
incurred by them); or (2) Forgo the
entitlement if not claimed within the date. • Any goods or services that attract GST
The new Scheme provides for a third option of 12% or more will qualify for this
of "spend on something other than travel". purpose. Even interior decoration and
phone bills having GST of 12% or more
OM dated 20 October 2020 providing further are permissible.
clarifications
• There is no prescribed format for
• Furthermore, in response to multiple queries applying for the Scheme. A simple
from CG employees, the CG issued another application conveying the desire of the
OM dated 20 October 2020 to provide employee for availing of the Scheme can
and tax exemption would be available only to the extent of 75% i.e., up to
6
For instance, deemed LTC fare is INR80,000, three times of which is INR INR60,000 only. If the employee has received advance of INR80,000, they should
2,40,000. If the employee expends only INR1,80,000, then the deemed LTC fare refund excess INR20,000 to the employerbe made and if advance is required for • The employee should exercise an
the purpose, it can be mentioned in the option for the deemed LTC fare in
application. lieu of the applicable LTC in the
current block period of 2018-21.
• An employee has the flexibility to
partially avail of the regular LTC fare for • The employee should spend a sum
some of their family members, as per equal to three times the deemed
the existing rules, and avail of the LTC fare during the period of 12
Scheme for some of their family October 2020 to 31 March 2021.
members.
• The sum must be spent on goods
• The reimbursement is based on or services attracting GST of 12%
production of invoice with details of or more from a GST-registered
GST. Hence, even if expenditure is vendor.
incurred on or before 31 March 2021 on
the basis of the invoice, but the actual • The payment must be made
product or service is received in April through digital mode and the
2021, it will qualify. But, as far as employee must produce GST
possible, the claim should be made and invoice.
settled well before 31 March 2021 to
avoid any last-minute rush and resultant • Where the amount spent by the
lapse. employee falls short of three times
of the deemed LTC fare on
• The invoice submitted for specified expenditure during the
reimbursement under the Scheme specified period, the tax exemption
should be in the name of the employee will be restricted to the pro rata
availing of the Scheme, even if the amount of the shortfall of LTC fare
digital payment is made by using credit and the excess LTC fare received
card of spouse or any other family by the employee, if any, should be
member. refunded to the employer. The
Press Release provides an
• There is no limit on the number of example: if the deemed LTC fare is
transactions but, as far as possible, the INR80,000, three times of the fare
number of transactions may be limited will be INR2,40,000. If the
to a minimum extent to avoid any employee expends only
difficulty/delay. INR1,80,000, then the deemed
LTC fare and tax exemption would
• Procurement from e-commerce be available only to the extent of
platforms is also permissible, provided 75% i.e., up to INR60,000 only. If
the relevant invoice/details are the employee has received an
submitted. advance of INR80,000, they
should refund the excess
► Extension of the Scheme to non-CG employees INR20,000 to the employer.
through the Press Release
• The DDOs (i.e., the employers) can
• With a view to benefit other employees (i.e., allow tax exemption subject to the
other than CG employees) who were not fulfilment of the above-mentioned
covered by the OM dated 12 October 2020, conditions and after obtaining copies
the CG decided to grant similar tax exemption of invoices of the specified
on the cash equivalent of LTC fare paid to expenditure.
them.
• Employees who have opted for
• Briefly, the Press Release provides for the payment of tax under the new
following: concessional tax regime will not be
entitled to this tax exemption since
• Payment of cash allowance to non-CG the same is in lieu of the exemption
employees as deemed LTC fare will be provided for LTC fare.
eligible for tax exemption, subject to
fulfilment of conditions described below. • The clarifications provided by the CG
vide the OM dated 20 October 2020
• The tax exemption will be restricted to and any further clarifications that may
the deemed LTC fare up to a maximum be issued in this regard, shall equally
of INR36,000 per person for a round apply to non-CG employees.
trip.
• The legislative amendments to the ITL
• However, the employees opting for this provisions for this purpose shall be
Scheme will be required to fulfil the proposed in due course.
following conditions:both shall be reduced proportionately (illustrated by an
Comments example given in the Press Release). The OM dated 20
October 2020 also clarifies that if the advance is
availed of by the employee, the proportionate unspent
While the Scheme announcement was made for amount should be recovered from the employee.
employees of both government and private sectors, the
Scheme was implemented for CG employees through Considering that the Scheme has a short-term utility till
OMs dated 12 October 2020 and 20 October 2020.The 31 March 2021 and is intended to boost consumption
private sector was eagerly awaiting a specific circular demand in the economy amidst the COVID-19
from the CBDT for implementation. The present Press pandemic, private sector employers will need to
Release partially meets the expectation and provides a evaluate the mode of implementation within the
basis for private sector employers to implement the parameters of the policy announcements made so far,
Scheme in the absence of any legislative provisions. despite the basic distinction in the salary structure of
The Press Release provides assurance that the CG employees. In the absence of any further
legislative amendments will be moved in due course to clarification from the CBDT on the third condition
ratify the Scheme. This is comparable to an earlier referred above, the employer may have little choice but
press release dated 13 May 2020 for reduction in to implement it in the manner similar to CG employees
domestic withholding rates by 25% as part of COVID-19 (i.e., payment subject to the condition of actual
relief measures which was, subsequently, statutorily spending up to three times and any recovery of pro
codified through The Taxation and Other Laws rata amount of shortfall in spending). Payment of the
(Relaxation and Amendment of Certain Provisions) Act, shortfall in spending as taxable allowance may run the
2020. risk of denial of exemption on the amount which is
actually spent.
While the Press Release refers to “non-CG employees”,
it does also clarify that its object is to provide benefits Any further clarifications from the CBDT will be
to “other employees” (i.e., non-CG employees). Hence, welcome. The clarifications can cover issues like
it can be reasonably interpreted, in line with the whether private sector employers can restructure their
Scheme announcement of 12 October 2020, to be compensation package w.e.f. 12 October 2020 for
applicable to all employees, whether in the public or offering the deemed LTC fare as a new component
private sector. Even employees of entities other than even in the absence of LTA in the existing package,
companies like proprietary concerns, general whether the spending is also eligible for other tax
partnerships, limited liability partnerships (LLP), deduction like deduction for life insurance premium,
charities etc., can avail the benefit. modes of permissible digital payments, whether hard
copies of GST invoices need to be furnished etc.
Where the salary package of employees is structured
on the lines of CG employees (i.e., they are entitled to The present Press Release requires employees to
LTC only if they take leave and travel), which is exercise the option of deemed LTC fare. The OM dated
prevalent in the public sector, the implementation may 20 October 2020 clarifies that there need not be any
not pose significant challenges. specific form for exercising such option and simple
application should suffice.
However, private sector employers who offer salary
package on “cost-to-company” (CTC) principle, will face The exemption limit of INR36,000 applies on per
the predicament of modifying their compensation person basis. This can be reasonably interpreted to
policy to accommodate the Scheme, while ensuring cover the employee and “family” members, as per the
that it is compliant with the parameters applicable to existing provision in the ITL where “family”’ in relation
CG employees. In CTC, employees are paid LTA to an individual is defined to mean: (a.) The spouse and
irrespective of actual travel. Exemption is allowed only children of the individual. (b.) Parents, brothers and
if an employee avails of leave and travels and furnishes sisters of the individual or any of them, wholly or
requisite evidences, failing which LTA is treated as mainly dependent on the individual. The existing rule
taxable. In some cases, LTA is paid even on a monthly also provides that the exemption shall not be available
basis. Such distinction in the compensation structures to more than two surviving children of an individual
of government and private sector employees is after 1 October 1998 except for: (a.) Children born
recognized by the CG, as is evident from its press before 1 October 1998. (b.) Multiple births after one
release dated 13 October 2020 issued to clarify certain child.
misconceptions.
While the Press Release clarifies that the exemption will
In this light, the third condition imposed by the present not be available to employees who have opted for
Press Release may be regarded as onerous and concessional tax regime, it may be noted that the
requires reconsideration/further clarity from the CBDT. option for concessional tax regime is to be exercised
The condition is that an employee who spends less than while filing return of income. Even if the employee has
three times of the deemed LTC fare on specified declared their option for concessional tax regime to the
expenditure during the specified period, shall not be employer for salary withholding purpose, they can still
entitled to receive the full amount of deemed LTC fare opt out of it while filing return of income. Although
and the related income tax exemption. The amount of employers will be constrained not to grant exemption
for deemed LTC fare for salary withholding, the
employee can still claim exemption and refund while
filing return of income.Ernst & Young LLP
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