October

In an earlier post we looked at the conditions governing tax exemption on leave travel allowance (LTA). In this post we will look at the calculation of the tax exemption amount. As mentioned in the earlier post, the exemption is available only on travel expenses (ticket fare etc.) incurred by the employee on leave travel. Expenses on local conveyance, boarding, lodging, sightseeing etc. cannot be considered.

Many people mistakenly believe that whatever is spent on leave travel towards ticket fare, taxi fare etc. can be considered in full for tax exemption. There are several conditions — as laid down by Section 10(5) of the Income Tax Act and Rule 2B of the Income Tax Rules — which govern calculation of the actual tax exemption. Let us see how one can calculate the tax exemption if an employee submits details of the travel expenses to the employer.

The two critical determinants of tax exemption on LTA are the mode of travel and the places visited by the employee.

Mode of travel determines extent of tax exemption

Whatever be the mode of transport (train, air, ship etc.) used by the employee, the extent of tax exemption is determined as per the following rules.

S. No	Journey performed by	Exemption Limit
1.	Air	Economy Air fare of the national carrier (Air India) by the shortest route to the place of destination.
2.	Any mode (bus, train, ship, taxi etc.) other than air to places which are connected by rail.	First Class Air conditioned rail fare by the shortest route to the place of destination.
3.	Any mode (bus, train, ship, taxi etc.) other than air to places which are not connected by rail.	a) Where public transport system exists, first class or deluxe class fare on such transport by the shortest route to the place of destination. b) Where no public transport system exists, first class A/C rail fare, for the distance of the journey by the shortest route, as if the journey has been performed by rail.

Table 1

[notification style=”error” font_size=”12px” closeable=”true”] The Income Tax Act and Rules refer to travel from one place (origin) to another (destination). While there is no explicit reference to the return journey in tax law, it may be assumed that the term “journey” for the purpose of determining tax exemption on LTA includes both “To” and “Fro” journeys. [/notification]

In case an employee travels to many places, calculation of tax exemption gets somewhat complex. We will see how to calculate tax exemption when an employee visits more than one place later. Let us first look at some illustrations when an employee travels from one place to another and gets back.

Leave travel to a single destination

If an employee travels by air from one place to another and gets back, the exemption shall be the actual air fare expenses incurred by the employee or the economy air fare in an Air India flight for the same places, whichever is lesser.

 Illustration 1

An employee travels by air from Chennai to Mumbai (and back) by business class and incurs Rs 50,000 towards air ticket fare. The return economy air fare from Chennai to Mumbai costs Rs 13,000 by Air India flight. The company reimburses Rs 50,000 towards LTA. What is the tax exemption available to the employee?

Ans: Since the economy air fare is lesser than the actual fare expense incurred by the employee, the tax exemption shall be limited to Rs 13,000. The LTA amount to the extent of Rs 37,000 will be taxable.

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If an employee (and his family) travels by train or any other mode (other than air)  from one place to another and back (the places are connected by train), the exemption shall be the actual train fare/ticket/travel expenses incurred by the employee or the First A/C train fare (if the employee had made the trip by train), whichever is lesser.

 Illustration 2

An employee travels from Chennai to Hyderabad by taxi and incurs Rs 30,000 towards taxi fare. The First A/C train fare for Chennai to Hyderabad costs Rs 2,000. The company reimburses Rs 30,000 towards LTA. What is the tax exemption available to the employee?

Ans: Since the First A/C fare is lesser than the actual fare expense incurred by the employee, the tax exemption shall be limited to Rs 2,000. The LTA amount to the extent of Rs 28,000 will be taxable.

Illustration 3

An employee and his family travel by train from Chennai to Hyderabad by second A/C and incur Rs 13,000 towards train fare. The First A/C train fare for Chennai to Hyderabad for the employee and his family costs Rs 16,000. What is the tax exemption available to the employee?

Ans: Since actual fare expense incurred by the employee is less than the First A/C fare, the tax exemption shall be limited to Rs 13,000.

Illustration 4

An employee and his family travel by taxi from Place A to Place B which are not connected by train and incur Rs 6,500 towards taxi fare. How should the tax exemption be calculated?

Ans:

– If there is public transport facility (say, bus) available for travel between Place A and Place B:

The tax exemption amount shall be Rs 6,500 or the first class/deluxe fare by way of the public transport, whichever is lesser.

– If there is no public transport facility available for travel between Place A and Place B:

The tax exemption amount shall be Rs 6,500 or the First A/C train fare for travel between 2 other places of the same distance as from Place A to Place B.

Leave travel to multiple destinations

Calculation of tax exemption gets complex when an employee travels to multiple places as part of leave travel. In addition, employees may use multiple modes of transport to complete their leave travel. This makes calculation even more difficult.

If an employee travels to more than one destination, the basis of calculating tax exemption shall be as follows:

Where the journey is performed in a circuitous route, the exemption is limited to what is
admissible by the shortest route. Likewise, where the journey is performed in a circular
form touching different places, the exemption is limited to what is admissible for the
journey from the place of origin to the farthest point reached in India, by the shortest route.

Since the law provides for calculation of tax exemption on travel expenses between only 2 places, the employer should determine the farthest place (travelled to by the employee) from the place of origin and specify the same as the travel destination. Further, the employer should determine the shortest route from the place of origin to the place of destination. For the shortest route, the employer should apply the rule related to mode of travel (as stated in Table 1) and determine the tax exemption.

Illustration 5

An employee travels from Chennai to Hyderabad via Bangalore by Third A/C compartment and spent money on ticket fare as follows.

• “To” journey: Chennai – Bangalore: Rs. 900——————————-Bangalore – Hyderabad: Rs 1,200
• “Fro” journey: Hyderabad – Bangalore: Rs. 1,200 ————————Bangalore – Chennai: Rs 900

All told, the employee spent Rs 4,200 on leave travel. What is the tax exemption?

Ans: Step 1: Since the employee travelled to multiple destinations (Bangalore and Hyderabad), the employer needs to determine the farthest place from Chennai (place of origin). The farthest place from Chennai is Hyderabad.

Step 2: Since the mode of travel is train and travel by the shortest route from Chennai to Hyderabad would involve taking a direct train from Chennai to Hyderabad, the employer needs to calculate the First A/C fare from Chennai to Hyderabad and back.

First A/C train fare: Chennai to Hyderabad and back: Rs 4,500.

Since the total train fare expense incurred by the employee is less than the first A/C train fare of Rs 4,500, the tax exemption is Rs 4,200.

Leave travel to multiple destinations by multiple modes of transport

This is when the calculation of tax exemption gets really difficult. When an employee travels to many places, the employer needs to determine the farthest place (from the place of origin) and calculate the shortest distance. This is the easy part.

However, the law is not clear as to which mode of transport should be considered for the purpose of calculating tax exemption when an employee uses more than one mode of transport. Given that air fare (economy class) and train fare (First A/C) are prescribed as the benchmark by tax law, if an employee travels by both air and train during leave travel, which benchmark (air or train fare) should be considered for the purpose of calculating tax exemption?

There are only 2 benchmark modes of transport (air fare if the travel is by air and train fare if the travel is by any other mode) prescribed by the income tax department for the purpose of exemption calculation. We are of the view that if an employee uses both air and train, employers should use the train fare as the benchmark for calculating tax exemption since this case would fall under “other mode” of transport. Unless an employee travels by air to all destinations during his leave travel, air fare should not be considered as the benchmark.

Illustration 6

An employee’s leave travel is as follows:

• First leg: Chennai to Mumbai – Air travel
• Second leg: Mumbai to Delhi – Train travel
• Final leg: Delhi to Chennai – Taxi travel

How should the tax exemption be calculated?

Ans:

Step 1 – Determine the farthest place and label it as the destination.

Since Delhi is the farthest place from Chennai, Delhi shall be the destination.

Step 2 – Determine the mode of travel

While the employee travelled by air from Chennai to Mumbai, he travelled by train and taxi to other places. Hence, train shall be considered as the mode of transport for the purpose of tax exemption calculation. It may be noted that all the places the employee travelled to are connected by train in this example.

Step 3 – Calculate the tax exemption.

Since Chennai (origin) and Delhi (destination) are connected by train, consider the First A/C train fare of the train which takes the shortest route from Chennai and Delhi. Compare the train fare with the actual travel expense incurred by the employee. The amount which is lesser of the two shall be the exemption amount.

Employers should collect and scrutinize proof of leave travel

Many employers are under the impression that they need not collect proof of leave travel as per a Supreme Court judgement. According to the judgement:

There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s).

However, in the TDS circular issued in the recent past, the Income Tax Department has specified that employers need to collect and scrutinize the proof of travel (ticket etc.) before granting tax exemption. The relevant excerpt from the Income Tax Department circular is as follows.

Obligation of the employer –The employer has to satisfy the obligation that leave travel
(fare) concession is not taxable in view of section 10(5) the employer is not only required to
be satisfied about the provisions of the said clause but also to keep and preserve evidence in
support thereof.

All employers should now collect proof of travel from employees if they wish to grant tax exemption on LTA.

Travel proof

• In case of air travel, air ticket and boarding passes.
• In case of train travel, the train ticket.
• In case of travel by taxi, the taxi bill should contain the name of the employee, details of the places visited, distance covered and date of travel.
• If an employee travels with family, the details of the family members (name, relationship and age) should be submitted to the employer. The employee should submit a declaration that his parents, brothers and sisters — whose travel expenses are to be included for tax exemption– are wholly dependent on him.

[notification style=”warning” font_size=”12px” closeable=”true”] When an employee’s family includes small children and senior citizens whose travel expenses are sought /to be included and if First AC train fare is the benchmark, employers should use the corresponding train fare of children and senior citizens for the purpose of tax exemption. [/notification]

Illustration 7

An employee travels with his wholly-dependent, 75 year old father on leave by taxi and incurs taxi fare. When looking at the corresponding First A/C train fare for comparison, the employer should consider the discounted train fare which a 75-year old person is entitled to for the purpose of calculating tax exemption.

Issued faced by employers

As we mentioned in our earlier post, we believe that the law governing tax exemption on LTA is complex to understand and difficult to follow. Let us take a look at the typical issues employees face while calculating tax exemption on LTA.

1. When employees travel to multiple destinations, it may not be easy to determine the farthest place by compliance personnel.
   For example, let us assume that an employee who works in a Chennai based company visits many places in Assam and Meghalaya on leave travel. It may not be easy for the compliance personnel sitting in Chennai to determine accurately the farthest place. Also, determining the farthest place can be arduous and time consuming if there are many employees who do circuitous leave travel.
2. When an employee visits places which are not connected by train, employers may find it difficult to get details regarding public transport in the areas visited by the employee in order to calculate tax exemption.
3. Calculating equivalent First AC train fare can be time consuming, particularly when an employee travels with his family.
4. Many employers pay LTA as a monthly fixed pay and collect travel bills for scrutiny and calculate tax exemption on LTA only towards the end of the year. If an employee travels in the early part of the year, the First A/C train fare or air fare at the time of travel may not be the same as that towards the end of the year when employers calculate tax exemption. If there is a change in train fare towards the end of the year, employers may not find it easy to locate the train/air fares which were in effect at the time of the employee’s travel.

The Income Tax Department should consider simplifying the rules governing tax exemption on LTA. Compliance officers in employer organizations currently find it difficult to meet the onerous conditions laid down in this regard. A simpler set of rules will go a long way in enhancing compliance.

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As a company engaged in the business of payroll processing and statutory compliance related to payroll, we wonder if the tax law governing tax exemption on Leave Travel Allowance (LTA) is the most complex tax legislation in India. Not only is the law difficult to understand and interpret but also quite difficult to implement. Each year organizations face significant difficulty while calculating tax exemption on LTA when they carry out the year-end tax compliance work. Let us examine the law and the practice related to calculation of LTA exemption in this post.

Section 10(5) of the Income Tax Act, 1961 (along with Rule 2B of the Income Tax Rules) governs calculation of tax exemption on LTA. The key conditions as specified by Section 10(5) (and Rule 2B) are as follows.

LTA payment to employees

LTA should have been paid/be payable to an employee if an employee wishes to avail tax exemption on LTA. In other words, if an employee does not receive an amount under a separate head of pay — called for example LTA or LTC — for the purpose of meeting leave travel expenses, the employee cannot avail tax exemption on account of leave travel.

Also, in any particular tax year (Apr to Mar), tax exemption shall be limited to the LTA (or by whatever other name the head of pay for the purpose of meeting leave travel expenses is called) amount which is paid to an employee in that tax year.

Illustration:

An employee is eligible to receive Rs 12,000 in a tax year (Apr to Mar) under the LTA head of pay. However, the employee can choose not to receive the LTA amount in a tax year and he or she can carry forward the LTA amount to the next tax year. What is the maximum LTA amount on which tax exemption should be calculated?

If an employee chooses to receive LTA each year (without carrying it forward), the maximum tax exemption the employee can receive shall be Rs 12,000 per tax year.

If an employee chooses to carry forward the amount in tax year 1 and receives Rs 24,000 under LTA in tax year 2, his LTA tax exemption shall be Rs 0 in tax year 1 since he did not receive any amount under LTA and in tax year 2, the maximum tax exemption he can receive on LTA shall be Rs 24,000.

How often can tax exemption be availed?

The tax exemption on LTA can be availed only in respect of two journeys performed in a block of four calendar years.

This is where the complexity related to calculation of tax exemption on LTA starts. According to the income tax law, an employee should have undertaken leave travel for the purpose of claiming tax exemption and in a block of 4 calendar years the employee can claim tax exemption for 2 journeys.

While income tax is calculated on LTA paid during a tax year (Apr to Mar), the exemption itself shall be provided only for 2 journeys across 4 calendar years. The first block (as specified by the tax department) of 4 calendar years commenced in Jan 1986. We are currently (Oct 2013) in the block starting Jan 2010 and ending in Dec 2013. An employer, before providing tax exemption on LTA, needs to check if the employee has availed tax exemption for more than 2 journeys in the particular block of 4 years. For example, let us assume that an employee claims tax exemption on LTA for the journeys he undertook in Apr 2010 and Apr 2011. If in the tax year Apr 2012 to Mar 2013 the employee claims tax exemption on LTA for the journey he undertook in say, Apr 2012, the employer should not provide any tax exemption since the employee has already used up the tax exemption on 2 journeys in the block (Jan 2010 to Dec 2013).

If an employee works with the same employer through the block of 4 years, the employer will know if the employee has availed tax exemptions for 2 journeys in the block. But if an employee moves from one employer to another during a block of 4 years, the second employer should check with the employee whether the employee has received tax exemption for more than 2 journey thus far in the block from the earlier employer and provide tax exemption accordingly.

In addition to the above, if an employee does not avail tax exemption (for either 1 or 2 journeys) on LTA in a block of 4 calendar years, he or she can avail tax exemption for 1 journey in the first year of the next block of 4 years. In other words, an employee can avail up to 3 exemptions in a block of 4 years if the employee did not avail tax exemption on 1 or 2 journeys in the previous 4 year block.

The income tax act only talks about a maximum of 2 (or 3) journeys for the purpose of tax exemption in a block of 4 years. An employee can undertake both the journeys in the first year and claim tax exemption in the first year itself. If 2 journeys are undertaken in the first year itself, the employee has to wait for the next block of 4 years before he can avail tax exemption on LTA.

We wonder how the income tax department came up with the idea of looking at calendar year for the purpose of LTA tax exemption. Maybe the calendar year idea came from statutes such as the Shops and Establishments Act which mandate providing leave to employees as per calendar year.

Also, why a maximum of 2 tax exemptions in a block of 4 years? Employers find it difficult to keep track of the number of times an employee avails tax exemption on LTA. The tax department could allow tax exemption on LTA each tax year. This would make the life of employers easy. After all, what is wrong in encouraging people to take a vacation each year instead of twice every 4 calendar years?

What does “travel expense” mean?

Travel expenses refer to the cost of travel (ticket fare etc.) alone. Expenses on boarding, lodging, sightseeing etc. should not be considered for the purpose of tax exemption. In addition, travel expenses should pertain to leave travel within India. Expenses on overseas travel cannot be considered for the calculation of tax exemption.

Can travel expenses of an employee’s family be considered?

Yes, travel expenses incurred on both the employee and his/her family members can be considered for tax exemption subject to the following conditions.

a. The employee should have taken leave from his organization and travelled along with his/her family members for availing the tax exemption. In other words, if an employee does not travel, the travel expenses of his family members cannot be considered for tax exemption.

b. “Family” in this regard means (i) the spouse and children of the employee, and (ii) the parents, brothers and sisters of the employee provided that they are wholly or mainly dependent on the employee. Please note that if the parents, brothers and sisters of the employee are not dependent on the employee, their travel expenses cannot be considered for the purpose of tax exemption.

There is a twist with regard to the travel expenses of an employee’s children as per sub-rule (4) of rule 2B of the Income Tax Rules. Tax exemption on LTA is not be admissible to more than two surviving children born after 1-Oct-1998. This restriction is not however applicable in respect of children born before 1-Oct-1998, and also in cases where an employee, after getting one child, begets multiple children (twins/triplets/quadruplets, etc.) on the second occasion. In other words:

• the exemption is admissible to all surviving children born before 1-Oct-1998;

• the exemption is admissible to only two surviving children born on or after 1-Oct-1998. However, if an employee after his or her first child, begets twins, triplets etc. the multiple children (twins, triplets etc.) on the second occasion will be counted as one child only.

Also, Section 2 (15B) of the Income Tax Act defines a child as including step-child and an adopted child of an employee.

Why should the income tax law penalize employees if they have more than 2 children by not extending the law to cover travel expenses of the third (and subsequent) children unless they are twins, triplets etc.? Why can’t the tax department be considerate towards families with more than 2 children? Surely, there must be better ways of incentivizing people to keep their families small!

Many people believe that the entire travel expense can be considered for tax exemption. Not quite. There are several conditions one needs to consider in order to arrive at the exact amount of tax exemption. After having read this post so far, if you believe that the conditions for availing tax exemption on LTA are onerous, just wait until you read the next post which will deal with the the calculation of tax exemption on LTA in detail and also the issues faced by employers while administering tax exemption on LTA.

After reading the next post you will appreciate why we wonder whether the tax law governing tax exemption on LTA is among the most complex legislations to read and put in practice.

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As per a recent circular issued by the Income Tax Department, employees who pay house rent of more than Rs 1 lakh per annum should submit the Permanent Account Number (PAN) of their landlord to the employer if they wish to claim tax exemption on House Rent Allowance (HRA). This is effective for the tax year 2013-14 (A.Y. 2014-15). In case the landlord does not have PAN, employees should collect a declaration to that effect from the landlord and submit the same to the employer.

The relevant excerpt from the circular is as follows.

Further if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for
the employee to report PAN of the landlord to the employer. In case the landlord does not have
a PAN, a declaration to this effect from the landlord along with the name and address of the
landlord should be filed by the employee.

In the tax year 2012-13, employees were required to submit the PAN of the landlord only if the annual rent they paid was above Rs 2 lakh. With the Income Tax Department bringing the rent amount floor to Rs 1 lakh for the tax year 2013-14, a large number of employees are likely to get impacted.

What if an employee changes residence and has multiple landlords in a year?

If an employee resides in one house throughout the year and pays rent in excess of Rs 1 lakh, the employee needs to furnish the PAN of/declaration from the landlord. However, if an employee changes residence during the year and pays less than Rs 1 lakh to each landlord but pays in excess of Rs 1 lakh in aggregate in annual rent, how should the directive in the circular be understood?

For example, if an employee lives in a house for the first six months in the year paying a total rent of Rs 60,000 and lives in another house for the remaining six months paying a total rent of Rs 60,000, should he furnish the PAN of both the landlords since the aggregate rent he pays is more than Rs 1 lakh in the year?

Is the emphasis on the aggregate annual rent paid by the employee or on a single landlord receiving more than Rs 1 lakh in rent in a year? The circular is not clear in this regard.

We would like to adopt a conservative view on this and suggest that employers seek the PAN of/declaration from the landlord(s) if the annual rent paid by an employee exceeds Rs 1 lakh — irrespective of whether there is one or many landlords, and irrespective of whether the rent paid to each landlord exceeds Rs 1 lakh.

A word of suggestion

Kindly inform your employees that if they are unable to submit the PAN of/declaration from their landlord they will lose tax exemption on HRA if their annual rent exceeds Rs 1 lakh in 2013-14. HRA exemption is an important avenue of tax saving for many employees and loss of HRA exemption can lead to a significant increase in tax for the employees towards the end of the year.

Please request your employees to be prepared to submit the PAN of/declaration from their landlords whenever they submit the rent receipts. We have a few months to go before we start collecting rent receipts as part of the year-end scrutiny. Employees, if they are informed well in advance, will have sufficient time to collect the PAN of/ declaration from their landlords.

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