Trip that includes a foreign leg is not eligible for LTC, say experts

This condition is not satisfied merely by the trip starting and ending in India

A recent judgement by the Supreme Court (SC) has underlined the point that Leave Travel Concession (LTC) can be offered only on travel within India. If the trip involves a foreign leg, the employer must deduct TDS (tax deducted at source) on this payment.

In State Bank of India (SBI) versus Assistant Commissioner of Income Tax, employees of SBI undertook trips that started and ended in India. En route, however, they also visited foreign countries. One employee, for instance, undertook the following journey: Delhi-Madurai-Colombo-Kuala Lumpur-Singapore-Colombo-Delhi. The SBI paid LTC to such employees without deducting TDS.

The SC dismissed SBI’s appeal on two grounds. One, it said, according to the rules governing LTC, travel must be done from one designated place in India to another within India.

Pallav Pradyumn Narang, partner, CNK says, “The Supreme Court has ruled that LTC is available only for travel within India. Mere starting and ending of the travel within India does not satisfy this condition.” 

Two, the SC said LTC should be paid for the shortest route between the two places. It ruled that SBI should have deducted TDS on LTC before paying its employees.

Employees wishing to avail of LTC must ensure they comply with its rules (Rule 2B of I-T Rules).

Tax-free travel allowance

Under Section 192 (1) of the Income-Tax (I-T) Act, employers must deduct TDS before paying salary to their employees. However, under Section 10(5), payment made to employees as LTC (a component of the cost-to-company) is exempted from taxation.

LTC is an allowance that pays for the employee’s cost of travel while on leave once in a year. Since it is tax-exempt, the employer needn’t deduct TDS on it.

Soayib Qureshi, associate partner, PSL Advocates & Solicitors, says, “LTC was introduced to motivate employees and also encourage tourism within India.”

Available under old tax regime

Both public-sector and private-sector employees can avail of LTC. Ashutosh K. Srivastava, senior associate, SKV Law Offices, says, “The amount covered under LTC is at the sole discretion of the employer.”

It can be availed for travel with the family. Not all employees can avail of it, however. Nikhil Varma, managing partner, Miglani Varma & Co–Advocates, Solicitors and Consultants, says, “LTC exemption is not available to taxpayers who have opted for the new tax regime.”

Understand the frequency

LTC can only be claimed twice within a block of four calendar years. The current block is from January 1, 2022 to December 31, 2025.

If an employee fails to avail of LTC within a four-year block, it can be carried over to the next block. Varma says, “The carried over exemption must, however, be claimed in the very first year of the succeeding block.”

Only travel cost included

LTC can be claimed for actual travel expenses by airline, train, or bus, subject to the maximum LTC received. In case of air travel, economy class fare can be claimed. In case of train travel, the cost of (up to) first class air-conditioned (AC) fare can be claimed. Where no recognised public transport is available, an employee can claim an amount equivalent to AC first class rail fare by the shortest route.

Maneet Pal Singh, partner, I.P. Pasricha & Company, says, “If an employee travels to various places in a single vacation, exemption can only be claimed from the place or origin to the farthest place by the shortest route, or the amount spent, whichever is less.”

Expenses incurred on hotels, shopping, food, or travel via private or hired car are not eligible.

Understand your company’s policy

Employees must comply with their company’s LTC policy. Varma says, “Some companies construe LTC strictly as an allowance to be paid on travel during a period of leave. They exclude travel on official holidays or weekends.”

Finally, in light of the recent case, avoid shenanigans such as opting for a circuitous route that includes foreign countries, and then seeking LTC.

LTC Rules for the Family

• LTC is not available if the family travels without the employee
• Family includes spouse, two children, and (fully or largely) dependent parents, brothers and sisters
• You can’t claim LTC if you take your family on an official trip
• If both spouses are employed, they can’t claim LTC for the same journey
• If both spouses work, the family can travel every year and claim LTC every year (two calendar years for each spouse)
• An employee can only avail LTC for up to two children if they were born after October 1, 1998 (there’s no such restriction on children born before this date)