How the LTC cash voucher scheme will work

As part of the demand stimulus package, the Finance Minister announced an LTC (leave travel concession) cash voucher scheme for Central government employees. The scheme will be available to employees of State governments and the private sector too — if its employers opt for it and follow the guidelines laid down by the Central Government. Here’s the rationale behind the scheme, and how it will work.

The rationale

Thanks to Covid, many of us have not been able to go on our annual vacation this year. So, we could stand to lose the tax benefit on the LTC amount that the employer gives us. That’s because the tax benefit on LTC (also known as LTA — leave travel allowance) is given only when we spend money on domestic travel for ourselves and the family. The LTC money spent on domestic travel is tax-exempt if some conditions are fulfilled. In short: no travel, no tax benefit.

The tax exemption can be claimed only twice in a block of four calendar years.

The current block for the LTC tax break is from January 2018 to December 2021.

If you have already claimed your tax benefit twice in the current block of four years, this new scheme will not benefit you. But if you have one or both tax benefits left to be claimed in the current block, the new scheme could come handy — even if you cannot travel this year.

Here’s how:

The LTC cash voucher scheme essentially says that you can still get a tax break, if you spend the money as per specified conditions.

But before we get to the conditions, let’s understand another payment — leave encashment — which employers often give employees. Leave encashment is different from LTC.

Many employers allow employees to encash a portion, say 10-15 days, of their unutilised leave every year — this is known as leave encashment. Such leave encashment, while in service, is taxable.

As per the LTC cash voucher scheme, in lieu of one LTC amount - central government employees will be paid the leave encashment amount, and the travel fare (as per three flat-rate slabs – ₹36,000; ₹20,000 and ₹6,000 per person towards deemed LTC for round trip) depending on the class of entitlement.

Here are the conditions to get the travel fare amount tax-free as per the LTC cash voucher scheme.

One, you will have to buy goods and services worth three times the travel fare and one time the leave encashment. So, if the travel fare amount (as laid down by the scheme’s three flat-rate slabs) is ₹100 and leave encashment amount is ₹50, you will have to spend at least ₹350 (three times ₹100 plus one time ₹50). Two, the goods and services must be bought before March 31, 2021. Three, not all purchases are eligible under the scheme – only money spent on those goods and services that attract GST of 12 per cent or more are eligible. So, make sure you check the GST rate if you want to use the purchase as part of the scheme. Four, you will have to buy the goods and services from GST registered vendors. Six, the payment has to be made through digital mode; so, don’t pay by cash. Last but not the least, you will have to produce the GST invoice to claim the tax break.

Tick all these check-boxes and there you are – eligible for a tax-exempt LTC amount. Now, note that the leave encashment amount you get will not get a tax-break - it will remain taxable, as before, when received while in service. Also read:

Grey areas

As per the tax laws, the tax break on LTC is allowed twice in a block of four calendar years. But as per the LTC cash voucher scheme, the money has to be spent by March 31, 2021.

The different time-lines might need reconciliation in the tax laws. Two, it needs to be seen how the scheme will be implemented in private companies, many of which give LTC every year and at sums much higher than the travel fare amount. Three, will the same three flat-rate slabs also apply to private sector employees or will they be different? Clarity on these aspects and more is awaited.

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