LTC Cash Voucher, Special Festival Advance Scheme: what’s in store for you?
It has been more than seven months now since India’s economy started battling COVID-19. The government has drawn up various plans to revive growth and relieve taxpayers. In the series of programs announced, the latest unveiled by the Honorable Minister of Finance Nirmala Sitharaman (FM) on October 12, 2020, focuses on increasing consumer spending in the current economic situation. To stimulate consumer demand, Hon’ble FM announced cash incentive programs for employees in the form of “LTC Cash Voucher Scheme” (LTC Scheme) and “Special Festival Advance Scheme” (Festival Scheme).
For Central Government Employees, Travel Leave Concession (LTC) is provided 2 times in every 4 years, during which airfare or train fare, depending on pay scale/entitlement, is reimbursed and in addition, the collection of 10 days leave is paid. Central government employees can benefit from one trip to their hometown and one trip anywhere in India or two trips to their hometown. The employee must actually travel to receive LTC benefits. In case an employee does not travel, this amount is deducted from the salary and the employee does not have the possibility to keep this amount after paying taxes.
For the corporate sector, two trips in a block of 4 years are generally provided for employees to travel anywhere in India.
LTC may be claimed as exempt subject to the conditions specified in the Income Tax Rules 1962 (“the Rules”).
Vacation cash, as the name suggests, is the salary received in lieu of vacation accrued during the year by an employee. Cashing out of leave is fully taxable for the duration of employment. However, on retirement or superannuation or resignation, it may be claimed as exempt, subject to the conditions specified in the Income Tax Act 1961 and Rules.
Due to COVID-19, employees avoided travel and therefore were unable to receive LTC benefits in the current block of 2018-21. Thus, under the LTC program proposed by Hon. FM, central government employees would be allowed to claim the cash equivalent of full payment of leave encashment and payment of the LTC tariff (based on the right to LTC) instead of an LTC in the block of the year 2018-21, under certain conditions.
To opt for the LTC regime, an employee would have to purchase goods/services (which attract GST of 12% or more, such as refrigerators, televisions, water coolers, mixer-grinders, vacuum cleaners, heaters , etc.) worth 3 times the rate and 1 time the collection of leave, before March 31, 2021. The goods/services must be obtained from a supplier registered for GST and the payment must be performed digitally; in addition, a GST invoice must be submitted to receive the benefit. In addition, to benefit from this package, the employee must opt for both the SLD rate and the collection of leave.
If the employee opts for the LTC plan, the tax exemption on the reimbursement of the LTC rate will continue; however, cashing out leave will remain taxable (applicable TDS will also be deducted).
As an example, suppose an employee is eligible for an economy class (family of 3) airline ticket. His remuneration is also under-
- Salary: Rs 50,000 per month
- Collection of leave: Rs 19,500
- Right to LTC tariff: Rs 60,000
To receive cash of Rs 79,500 (60,000 plus 19,500) under the LTC scheme, the total amount to be spent by the employee must be INR 199,500, comprising INR 19,500 (equivalent of leave cash ) and Rs 180,000 (3 times the LTC rate).
The taxation of the amount received of Rs 79,500 (assuming taxation at the slab rate of 20%) would be as follows:
Central government employees may also apply for an advance of up to 100% of leave receipts and 50% of the SLD tariff which will be settled on the basis of the production of receipts for the purchase and use of goods and services, as indicated above.
Hon’ble FM has also announced a ‘Special Festival Advance Scheme’ under which central government employees can obtain an interest-free loan of Rs 10,000 which they are expected to repay in 10 instalments. The money will be paid out via a prepaid RuPay card which will be deactivated after March 31, 2021. The unused amount will expire and employees will have to repay the consumed amount in installments.
Similar schemes can also be extended to state employees and private sector employees; however, specific clarification on this is needed from the authorities. In addition, tax authorities should establish specific rules on tax benefits applicable to non-central government employees.
This is a welcome move by the government as it would not only stimulate consumer demand, but it would also cause more money to flow through this cash-strapped economy, which is needed to put the economy on the fast lane.
Divya Baweja is a guest contributor. The opinions expressed are personal.