Leave Travel Allowance or Leave Travel Concession or Leave Travel Assistance (LTA or LTC) is a very powerful weapon given by employers to employees. It can become a very powerful tax planning tool for you to save your income tax if you put things together well ahead of time.
Investors with a meticulous attitude towards financial planning would have done this already but for the uninitiated, let us understand what this policy or rules in India state, what you can avail and what are its income tax rules.
If you are someone who travels very frequently with your family, then you can plan your travel to take best advantage of the income tax rules.
What is Leave Travel Allowance or Leave Travel Concession ?
LTA is an allowance or part of renumeration provided by an employer to an employee to compensate for the travel expenses that the employee or his family incurs in India. Getting reimbursed for your travel by an employer is a great offer so you better not miss it. Also note that LTA is valid only if you travel within India, not outside.
The definition of family is spouse, two children, parents, brothers and sisters who are wholly dependent on you.
It is important to understand what can be claimed and what cannot be – while travel expenses are fine either by rail, road or air, you cannot claim other expenses like lodging, food, sightseeing, porter charges, taxi and auto fares and other sundry expenses you incur when you travel.
You can claim LTA if you take leave from your company and actually travel. Proof of travel is required for the claim to be made. It must also be noted that you are the key person who should be travelling so if your family lands in Goa and you don’t, then you cannot claim !
The amount exempted under income tax rules is the amount required to travel to your destination by the shortest possible route, depending on the mode of your travel.
If you travel by air, the maximum amount that can be claimed as exempt is the economy class air fare to your destination by the shortest route. If you travel by rail (or road), the maximum amount that can be claimed as exempt is the air conditioned first class (AC I Class) rail fare to your destination by the shortest route.
LTA and the Block of Four Years
It is important to understand that the LTA is not linked to when you started your employment. The government of India has fixed a block of 4 years during which LTA or LTC can be claimed twice. These are not fiscal years (April 1 to March 31) but instead calendar years (January 1 – December 31).
The current block is between 2010 – 2013 – what this means is that between January 2010 to December 2013 you can claim LTA twice. But remember that though you can claim LTA twice in these 4 years, in one year, you can travel just once.
Now if you haven’t claimed LTA in a block, you don’t actually lose it – it gets carried over to the first year of the next block. So if you think for a moment, in a block, you actually can claim for three LTAs, one of which is the carried over. The caveat is that the carried over LTA needs to be claimed in the first year of the next block.
Income tax rules
The calculation is simple.
If your company gives an allowance of say Rs 75,000 per annum as LTA and you produce a air fare ticket of Rs 25,000/-, then Rs 25,000 will be exempt from tax and the rest Rs 50,000 will be taxable in your hands depending on which tax bracket you fall into.
Suppose you do not travel at all, in that case the entire LTA will be taxed and the post taxable amount will be credited as part of your salary.
LTA rules for a working couple
This gets a bit interesting. If both the spouses are working, who can claim LTA and to what amount ? Again the rules state that both can claim LTA. So for a working couple, we are talking about 4 LTA claims in a block of 4 years. Needless to say, both cannot claim for the same journey.
But if you observe, they can travel in each year and don’t have to worry about travelling once each 2 years. If planned well, a working couple can actually enjoy their holidays and reduce their taxable income each year.
So what are you waiting for ? Instead of paying tax to the government, go and spend some quality time with your family and save money !