Centre extends tax break on purchase of goods with travel allowance to all

New Delhi: The finance ministry has extended to everyone a tax incentive it announced earlier this month to central government employees who use their holiday travel allowance for purchase of goods, said an official statement.

The ministry stated that the cash voucher scheme meant to boost consumption under which holiday travel allowance will be given to employee’s tax free in lieu of reimbursing their travel expenses will be provided to non-central government employees too.

The pay-out is meant to encourage purchase of taxable goods and services that will support economic recovery. A government official explained that the scheme now stands extended to private sector employees too. The other beneficiaries are employees of all state governments, state owned enterprises and banks.

The payment of leave travel concession facility originally meant as a reimbursement of travel expenses and given as cash allowance under the scheme is subject to a maximum of ₹36,000 per person as ‘deemed LTC fare per person,’ said the ministry. To enjoy this incentive, the employee has to opt for deemed LTC fare in lieu of the applicable LTC in the block of four years 2018-21.

The employee should also spend a sum equal to three times of the value of the deemed LTC fare on purchase of goods or services which carry a GST rate of not less than 12%. The purchase has to be made from GST registered sellers through digital mode during the period from the 12 October 2020 to 31 March, 2021, the ministry said. An employee who spends less than three times the deemed LTC fare will not get the full amount of deemed LTC fare and the related income-tax exemption, the ministry said.

There will be a proportionate reduction in the deemed LTC payout and the income tax exemption. In case the employee has availed the full deemed LTC payout as an advance and could not spend the required amount, the part of the advance not eligible under the scheme needs to be returned to the employer. This income tax exemption will provide income tax relief to those employees, who are already planning some expenditure, such as purchase of vehicle, electronics, home improvement or any other similar expenditure.

This income tax benefit may actually be considered as discount on expenditure, which the employee has already planned to incur, instead of a reason to incur expenditure, said Shailesh Kumar, Partner , Nangia & Co LLP, a consultancy.

On the other hand, income tax foregone by the government may be offset by the additional GST revenue on expenditure incurred by the employees, said Kumar.