Understanding the LTC cash voucher scheme

What is the LTC cash voucher scheme?

The LTC cash voucher scheme is a new initiative by the Indian Government to incentivise consumption. In this scheme, the employees will receive an equivalent sum of their eligible LTC fare as a cash payout that is exempt from tax. How much every employee receives is based on their individual allowed LTA limit.

After initially making this benefit-eligible only to central government employees, the Indian Government has decided to make this benefit available to all employees, including workers in the central government, state government, state-owned organisations, and the private sector.

Usually, tax benefits on LTC are offered only if the employee actually travels and produces the corresponding receipts. However, since the pandemic has hit the travel industry significantly, and there's a huge risk involved in individuals traveling to different parts of the country, the benefit is now available to employees without traveling. As always, there are conditions. These benefits are given to employees only if they fulfill specific criteria.

LTC Cash Voucher Scheme | Zoho Payroll

Employees' eligibility, fare limit, and spending criteria

Eligibility criteria:

    • Employees will be eligible for this scheme only if the family has not gone on a vacation in the current LTC year block (2018-2021).

    • Employees should spend thrice the LTC fare allowance to claim the tax exemption amount.

    • Employees should also spend their 10 days leave encashment money to get the maximum tax exemption.

    • Employees should spend all this money before 31 March 2021.

Spending criteria:

    • Employees should spend the money on goods and services with 12 percent GST or more.

    • Employees should also ensure that they purchase from a GST-registered vendor or service provider, as the invoices have to be submitted for verification.

LTC fare slabs:

Employee category

Round-trip LTC eligibility per person

Employees eligible for business class travel

Rs. 36,000

Employees eligible for economy class travel

Rs. 20,000

Employees eligible for train travel across any class

Rs. 6,000

The maximum payout for any employee is Rs. 36,000, based on the topmost eligibility level (employees eligible for business class travel). This payout will be exempt from taxes, as long as the employees fulfill the eligibility and spending criteria.

Let's learn how this LTC cash voucher scheme works with an example:

Let us assume that an employee is eligible for an AC tier-2 train ticket to a destination of his choice across India. This employee will be eligible to get a round-trip fare of Rs. 6,000 per person. For a family of four, this will come to Rs. 24,000.

In order to get this cash payout of Rs. 24,000, the employee has to spend thrice the payout amount: Rs. 72,000.

If the employee is also eligible for a leave encashment payout, that amount also has to be spent along with this amount. So if the employee receives Rs. 16,000 as leave encashment, his total spend should be Rs. 88,000 and the benefit will be approximately Rs. 40,000.

What if the employee has not spent thrice the eligible LTC fare? Will there be a tax exemption?

For employees who have spent less than three times their eligible LTC fare, there will be a tax exemption, but it will be lower than the total exemption amount that they are eligible to receive. It will be calculated proportionately based on what they spend.

Here's an example scenario:

Let us assume that an employee is eligible for an LTC payout of Rs. 80,000. To receive the complete tax exemption, the employee should spend Rs. 2,40,000. But if the employee spends only Rs. 1,80,000 (which is 75% of the total expense), then the tax exemption payout will be only 75% of the total exemption, which is Rs. 60,000.

One last rule to consider

Before we conclude this guide, we'd also like to highlight one last catch that is important for claiming this LTC cash voucher. Employees who have chosen the new tax regime that was introduced as part of the union budget earlier this fiscal year cannot claim this LTC exemption.

This tax exemption is a potentially valuable benefit, but it does come at a cost, with plenty of regulations attached to it. We suggest that you carefully understand all the rules clearly before you decide to open your wallet to get this one.


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