Leave Travel Allowance (LTA) or Leave Travel Concession (LTC) received by an individual from their employer is eligible for income-tax exemption, subject to the conditions outlined in Section 10(5) of the Income-tax Act, 1961, along with Rule 2B. This tax exemption is limited to the actual travel costs incurred by the employee.
In order to qualify for the exemption, the following essential conditions must be met:
- The individual must have undertaken the actual journey.
- The journey must be made while the employee is on leave or after their retirement or termination of service from their employer or former employer.
- The exemption is applicable to the actual expenditure incurred for the journey by the individual and their family.
- The individual is eligible for two trips within India during a block of four years (2018-21 onwards).
- The exemption for LTC is not available for more than two surviving children and also in case of multiple birth after one child of an individual after 01.10.1998.
- The exemption is only applicable to the shortest route to the place of destination.
- The exemption is limited to the air/rail/bus fare incurred by the employee, with no other expenses eligible for exemption.
- The employee must submit proof of travel to their employer.
Family, in relation to an individual, includes their spouse and children, as well as their dependent parents, brothers, and sisters.
On the other hand, Leave Travel Concession (LTC) is considered taxable if:
- It is encashed without the employee performing the journey.
- Any expenses other than the fare, such as boarding or lodging, are reimbursed.
- The amount received from the employer exceeds the cost of traveling on the shortest route.
Travel expenses refer to the cost of travel (ticket fare, etc.) alone and do not include expenses on boarding, lodging, or sightseeing. Additionally, the tax exemption only applies to travel within India, with expenses incurred for overseas travel not eligible for consideration.
CBDT’s Circular No. 413 [F. No. 194/9/79-IT(A-I)], dated 04.03.1985 outlines how the exemption for the value of Leave Travel Concession should be allowed when an employee is entitled to more than one LTC in a block of four years. The circular states that Section 10(5) provides for the grant of exemption from income tax to the value of the leave travel concession granted by an employer to an employee. The exemption is applicable in two situations – where the employee receives travel concession or assistance from their employer for themselves and their family while on leave to any place in India, or after retirement or termination of service from their employer or former employer.
The relevant extract of important judgments on Leave Travel Allowance (LTA)
Assessee-in-default for Short-Deduction of TDS on LFC/LTC Claims Related to Foreign Travel of Employees
In accordance with Section 10(5) of the Income Tax Act and Rule 2B of Income Tax Rules, 1962, ITO(TDS) determined that the exemption for LTC/LFC only applies to travel within India. As a result, the assessee-bank was deemed an “assessee-in-default” for failing to deduct TDS on the reimbursement of foreign travel by five of its employees. The decision of the CIT(A) was upheld, holding the assessee-bank responsible for short-deduction of TDS on LFC/LTC claims related to foreign travel, not eligible for exemption under Section 10(5) r/w Rule 2B.
No Statutory Obligation for Employer to Collect Evidence for TDS under Section 192
The exemption under Section 10(5) applies only to individual employees, and there is no requirement for the employer to collect evidence to support the declaration submitted by employees for TDS purposes under Section 192. This was established in the case of CIT v. Larsen & Toubro Ltd. (2009).
ITAT Allows Appeal for Reimbursement of LTC Expenses Based on Employee Declarations
In the case of CIT v. Semi-Conductor Complex Ltd. (2007), the ITAT allowed the appeal of the assessee after finding that full details of the journey and expenses incurred by employees had been given in the certificate submitted on the prescribed proforma. The Assessing Officer had failed to identify any instances of fraudulent or incorrect certificates given by employees.
Employer’s Statutory Obligation to Deduct TDS and Preserve Evidence
According to C.E.S.C. Ltd. v. ITO (2003), an employer is required to ensure that payments for leave travel concession are not taxable, as outlined in Section 10(5), and must preserve evidence to demonstrate compliance with the obligation to deduct TDS under Section 192. The employer must be satisfied that three conditions are met for exemption under Section 10(5): receipt of travel concession or assistance from the employer, for the purpose of traveling to their home district in India, and on the occasion of leave. The employer must also have evidence to support the exemption.
Fixed Leave Travel Allowance Not Exempt
Fixed amounts paid to employees as leave travel allowance, based on self-declarations, are not exempt under Section 10(5), as they do not meet the conditions outlined in the relevant tax laws and regulations.