With the Financial Year winding to a close by end of March and Summary Vacations on the horizon in April-May, many of us are planning our vacations during the time when our kids don't have School. Many of us go on yearly outings with family but most people don’t know or don’t use their Leave Travel Allowance. In fact, many of us would have heard the term LTA at some point during their careers but don’t bother to use it (including me) because we fail to appreciate its use and tax benefits.
The purpose of this article is to help you understand what LTA is and how to use it to reduce your tax liability.
What is Leave Travel Allowance?
Leave Travel Allowance is an allowance that is usually paid as part of Salary (Annual CTC to be specific) by employers to their employees. The original idea behind the LTA component was to help the employee meet his travel expenses. However, of late it has become yet another component of the CTC and no one cares much about it except how much is paid out as LTA every year by the employer.
LTA is usually decided for a year and then paid out on a monthly basis. For ex: If your LTA is Rs. 12,000/- every year, you will get Rs. 1,000/- every month as LTA.
Many Employers club together the allowances like House Rent Allowance (HRA), LTA, Medical Allowance etc. and come up with a final number that is added to the CTC. The employee is given the flexibility to decide how much of the total Allowance is allocated to each of the individual components. As LTA isn’t that popular with people, most of them usually enter a small number there and fail to utilize it properly. In other cases, company's themselves decide the LTA based on the employee's designation/experience etc.
Does the LTA Have Tax Benefits?
Of Course YES. Do you think, I will be writing an entire article if it weren’t important?
How does LTA Affect My Tax Liability?
Let us say your annual Salary is Rs. 6,00,000/-
After all your deductions like House Rent, Medical bills, Section 80C Tax Savings etc., your Taxable Income is Rs. 3,50,000/-
Let us assume, your annual salary includes a Rs. 25,000/- LTA component and if you satisfy all the criteria laid down by the Tax Authorities to utilize the LTA Tax benefits, your Taxable Income will come down to Rs. 3,25,000/-
Effectively, the entire LTA component of your Salary became Tax Free!!!
However, Did you read the Sentence "If you satisfy all the criteria laid down by the Tax Authorities to utilize the LTA Tax benefits" that I just used above?
Yes, the Tax Benefits aren’t available to everyone. You need to satisfy the following conditions in order to be eligible to avail this tax benefit.
Condition No. 1: The Amount should be spent only on Self and Immediate Family Who is totally dependent on you
By Family we are talking about - Spouse, A Maximum of two children, Parents, Brothers & Sisters Who are not employed and are dependent on your income
Condition No. 2: The Travelling Group should Include the person who is going to claim LTA
If you are not travelling with your family, you cannot claim LTA for that trip. For ex If my wife, two children and parents went to Delhi from Chennai, and I stayed back at work, I cannot claim LTA on that trip.
Condition No. 3: The Amount Claimed should be for Travelling Expenses Only via the Primary Mode of Travel
By Travelling Expenses, we are talking about the expenses incurred for the actual travelling part like Train Tickets, Air Tickets, Bus Tickets etc. Supplementary Travel expenses like Auto Fare, Taxi Fare etc. are not covered. All other expenses like Food, Accommodation, Sightseeing etc. are not covered as well.
Condition No. 4: Foreign Travel is not eligible for LTA
All Trips and Travels within the country of India only are eligible for LTA Exemption under the Indian Tax Laws
Condition No. 5: Travel Expenses are Considered only for the Shortest Route Possible
LTA Exemption can be claimed only corresponding to the fare that will be incurred if you take the shortest possible route. If you are travelling from Chennai to Bangalore, the amount you can claim is for a train/bus/flight that goes directly from Chennai to Bangalore. If you go from Chennai -> Hyderabad -> Bangalore for some strange reason and try to claim the two-trip expenses, it will not be approved. You have to either submit expenses for the Chennai -> Hyderabad -> Chennai trip or book tickets in a direct trip from Chennai to Bangalore
Condition No. 6: You can claim LTA only Twice in a Block of Four Years
You could claim LTA exemption in respect of any two journeys in a block of four years. The current block is 2010 to 2013. Say for example, you claim LTA exemption in 2010, then you could claim just one more till 2013. Remember - You cannot Claim LTA Every year.
There is some confusion about whether LTA follows the financial year or the calendar year. LTA Year blocks are always based on calendar year. So, it goes from Jan 2010 to Dec 2013 for the current block. The claim can be done in the financial year that the travel actually happened. If you traveled between April to Dec 2013 you can claim it in the tax returns you will be filing in 2014 for the financial year Apr'13 to Mar'14.
Condition No. 7: If Husband and Wife both receive LTA, They cannot claim the same Trip
If Husband and Wife both receive LTA as part of their salary, both of them could claim LTA individually as the rules of LTA apply individually to each of them. So in a block of four years, each spouse can claim LTA twice. The only restriction is that both spouses cannot claim an LTA exemption for the same journey. In other words, LTA cannot be claimed twice for the same journey.
Condition No. 8: You must have been on earned/annual leave on the dates for which you are claiming the LTA. You cannot claim LTA for days when you were working. You must have applied for annual or earned or paid leave (whatever you may wanna call it) and got it approved in order to claim LTA. There is actually no limit on the minimum or maximum number of days you need to apply for leave to claim LTA. But, for easier claims/processing try to utilize at least 3 consecutive days of annual leave for LTA purposes.
As you can see, though LTA can be pretty useful in reducing your tax liability twice in a block of four years, it isn’t straightforward and involves a lot of Conditions. If you intend on claiming LTA, make sure that you Remember these 7 conditions above.
After reading the above conditions, you would definitely have a few questions that are lingering in your mind. I have tried to answer a few of them below. If you have any more questions, please feel free to leave a comment and I will do my best to answer them.
1. Can I fly Business Class and claim LTA?
No. For air travel, the maximum amount that can be claimed as exemption is the economy class air fare.
2. What is the Maximum Fare I can claim as LTA while travelling by Road or Rail?
For rail or road, the maximum amount that can be claimed as exempt is the air conditioned first class rail fare to your destination by the shortest route.
3. What happens if I did not make a claim in the current block? Do I get any benefits for the next block?
In case you don’t avail of the LTA exemption in a particular block, whether for both the journeys or for just one journey, you could carry forward one journey to the first calendar year in the next succeeding block of four years. Thus, in the next block of four years, you could claim the carried forward travel, plus, two journeys of that particular block i.e. a total of 3 exemptions!
For ex: Let us say you are entitled to an LTA of Rs.10, 000 per year and you do not utilize it in the block 2010-2013. This amount could be carried forward to the first year in the next block of four years. You must therefore claim this amount in 2014 and then you can further more claim your LTA entitlement of that particular block (2 more times) as well.
Note that the maximum exemption you can avail in a block of 4 years is 2 * LTA amount per year. And this is also limited to the LTA Amount received in that year. This means - you can avail 2 LTA Claims each upper limit of that years LTA Amount.
4. How does One claim an Exemption?
As most of us are salaried employees, you can submit evidence for the travel (tickets/bills etc.) to your employer and they will include it in your form 16. If you are self-employed or missed submitting LTA to your company, you can avail the services of any chartered account who helps file Tax Returns for people and they will be more than happy to include this along with your tax calculations.
5. What happens if I spend more than my LTA amount?
In case your travel expenses exceed your actual Leave Travel Allowance amount, the exemption you can claim is limited to your LTA Amount. For ex: If your LTA is Rs. 25,000/- this year and you incurred Rs. 40,000/- in air fares for a family trip, your LTA Exemption will be limited to Rs. 25,000/- and the remaining Rs. 15,000/- will not give you any tax benefits.
6. What happens if I don’t exhaust my LTA amount?
In case your travel expenses are lesser than your actual Leave Travel Allowance amount, the exemption is limited to the actual amount spent. For ex: If your LTA is Rs. 25,000/- this year and you incurred Rs. 15,000/- in rail fares for a family trip, your LTA Exemption will be limited to Rs. 15,000/- and the remaining Rs. 10,000/- will not give you any tax benefits.
7. I Traveled more than once in a single financial year. Can I claim both for LTA?
8. I booked a tour via a travel operator as a Package. Can I claim the entire amount as LTA?
No. Only the actual amounts spent on Road/Air/Rail transport can be claimed. Other expenses cannot be claimed as LTA. The idea here is - We will go on vacations with our families irrespective of the Tax Benefits we get out of it. However, if we can get tax benefits, why waste it.
Updates - June 2016:
The Central Board of Direct Taxes (CBDT) has just revised their policy with regards to the claiming of Leave Travel Allowance.
So far, there was no specific form or format in which the particulars or evidences were required to be submitted. To streamline the same CBDT through its Notification has prescribed a new Form 12BB in which the details of deduction claimed have to be furnished by the employee, however the notification does not mention any particular documents to be preserved for claiming LTA. In other words, the CBDT notification has remained silent on the nature of evidence to be collected for deductions in the form of documents, which would have removed subjectivity. But the onus is both on the employer and employees to maintain robust documentation. These would include Air tickets / Railway Tickets / Bus ticket or bill issued by the travelling agent in case of journey performed by the other mode of public transport for journey performed in India to be produced as proof for LTA.
These rules have become effective from June 1 hence the salaried class returning from their vacation must take cognizance of this new norm and start obtaining the missing links of their travel bills and provide appropriate details since the declaration to be filed by the employee shall become a part of TDS return to be filed by the employer.
Why this Change?
There have been too many cases of fake LTA claims where people provide bogus travel receipts and claim LTA. To Avoid that the IT officials have come up with this new regulation which would help them identify such claims and punish the offenders.