Taxability of Leave Travel Allowance

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Oct. 3 – Leave travel allowance (LTA) is the one of the most common cases of reimbursement adopted by employers to compensate employees due to the tax benefits attached to it. Section 10(5) of the Income Tax Act (1961) read with Rule 2B, provides for the exemption and outlines the conditions subject to which LTA is exempt.

Who is covered by the benefits?
LTA exemptions can be maintained where the employer provides LTA to a member of staff for leave to any place in India taken by the employee and their family. Such freedom is limited to the extent of actual travel costs incurred by the employee. Travel has to be undertaken within India and overseas destinations are not covered for exemption.

Travel cost means the charge of travel and does not comprise any other expenses such as food or hotel accommodations. The meaning of “family” for the purposes of exemption includes spouse and children and parents, and brothers and sisters who are wholly dependent on you.

An individual would not be able to claim the exemption in relation to his parents, brother or sisters unless they are wholly or mainly dependent on the individual. Moreover, exemption is not obtainable for more than two children of an individual born after October 1, 1998.

This constraint does not affect in respect of children born before this date, and also in cases where an individual, after having one child, begets multiple children (twins or triplets or quadruplets, etc.) on the second occasion. The term “child” includes a step-child and an adopted child of the individual.

Duration of the exemption
The exemption is not for every year. The tax rules offer for an exemption only in respect of two journeys performed in a block of four calendar years. The current slab runs from 2010-2013. If an individual does not use their freedom during any block on any one or on both occasions, their exemption can be carried over to the next slab and used in the calendar year immediately following that slab.

In such cases, the journey carried out to claim such exemption will not be counted for the purposes of regulating future exemptions allowable for the succeeding block.

Proof of travel
The person will have to present proof of travel to his/her employer and also keep copies for his or her own records. Such proof is helpful at the time of the audit of the tax return of the individual. Proof of travel could be in the form of tickets, boarding passes, invoice of travel agent, or duty slip.

During the Fringe Benefit Tax (FBT) regime, provision of paid holidays, including travel cost to any place and stay expenses, were subject to FBT in the hands of employers and were not taxable in the hands of individuals. Many employers extended the paid holiday benefit instead of LTA.

Now with the elimination of FBT, with effect from April 1, 2009, paid holiday benefit is fully taxable in the hands of employees and therefore employers are reintroducing the LTA element by withdrawing the paid holidays benefit.

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