LTC Cash Voucher Scheme

 

 

The LTC Cash Voucher Scheme has been notified by the government in Budget 2021. Even though the scheme was initially announced for central government employees, the scheme was extended to private sector, PSU and state government employees by way of Press release.

 

In spite of the announcement of Scheme in October 2020 many employers had not rolled out the scheme for its employees since the LTC is part of the CTC in private sector. Now that the scheme has been notified let’s see how best one can benefit from the scheme especially keeping in mind the employees in Private Sector.

 

Here’s the text of the Budget Memorandum for 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 fulfillment 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.]

 

Now, let’s look at the practical aspects of how best one can benefit from this scheme.

(1)  One important point to keep in mind is that the exemption benefit is available to individuals paying tax at regular rates (Old regime) and not the optional rates (New regime).

(2)  The maximum exemption one can avail is Rs. 36,000 per person or 1/3^rd of the specified expenditure, this may be again subject to your entitlement for availing the benefit based on the deemed LTC fare as follows:

a.       Employees who are entitled to business class of airfare: ₹36,000 (per person Round Trip)

b.      Employees who are entitled to economy class of airfare: ₹20,000 (per person Round Trip)

c.       Employees who are entitled to Rail of any class: ₹6,000 (per person Round Trip)

(3)  Specified expenditure, goods or services which are liable to tax at an aggregate rate of 12 % or above under various GST laws and goods are purchased or services procured from GST registered vendors/service providers.

(4)  What to purchase? One should buy consumer durables like Sewing Machines, Desktop Computers, Laptops, Wooden Furniture, Air Conditioner, Refrigerator, Washing Machine, Dishwasher for which one has to just pay once and these goods can be used for say 5 – 10 years at least as these items are going to be part of your household and within the budget.

(5)  What not to purchase? Premium paid towards purchase of new life insurance policy may be an eligible item for LTC, still I would recommend not buying a life insurance policy just for the purpose of LTC scheme as the premium will have to be paid for next 5-10 years and the scheme wouldn’t be available next year for you to get exemption. On top of that your cash-flows would also be affected.

 

If you want to really see a win-win situation for yourself and the nation, use your hard earned money to buy consumer durable goods there-by increasing the consumption and economic growth the logical reason with which the scheme was announced, the other option is not to opt for the scheme, yet contribute to nation building by paying income tax.