To assume, a person can claim Rs. 144,000 as LTC and is categorized in the tax bracket of 42.74% as the highest. That person would save Rs. 61,551 in Tax, However, in order to save Rs. 61,551, the person will spend Rs. 144,000 thrice or Rs. 432,000 which is even seven times the tax saved.
The government extended the leave travel concession cash voucher scheme to the private sector employees last week. It was originally announced earlier in October for the central government employees alone.
Instead of submitting travel bills, employees can claim tax deductions on LTC under this scheme by spending the money on goods and services. Though this gives you the flexibility on claiming tax deductions on the money spent, which is equivalent to the LTC allowance, on goods and services, a person should be ready to spend 7-14 times the amount of saved tax, according to the back of the envelope calculations.
Does this kind of spending benefit everyone?
Not all spending will be eligible for the benefit of this scheme. Expenditure on goods and services will only be eligible for deductions if they are carrying the GST rate not less than 12%. The items that come under this are consumer goods like TVs, refrigerators, washing machines’ and other such products. Also, the goods and services have to be bought through online modes and the employees should make sure they obtain the receipt which indicates the GST number of the vendor and the amount of paid GST.
Now, let’s understand the math behind this:
According to government guidelines, employees will be able to claim a tax deduction equivalent to the LTC allowance up to Rs36,000 per person for a four-member family (Rs144,000 in total), provided the employees spend three times the LTC amount claimed as a deduction on buying goods and services.
Assuming a person can claim Rs144,000 as LTC and falls in the highest tax bracket of 42.74% (30% slab rate, including 37% surcharge and 4% cess on income more than Rs 5 crore), he would save Rs61,551 in tax. However, in order to save Rs 61,551 in tax, the person will have to spend Rs 144,000×3 or Rs 432,000, which is seven times the tax saved.
Homi Mistry, partner, Deloitte Haskins & Sells LLP said “However, the government has clarified that employees will be able to claim the tax deduction on a proportionate basis in case they spend a lesser amount. So, in case a person spends 50% of the required amount, he or she will be able to claim a tax deduction on a 50% amount.”
Should we all consider going for this!?
It is a good option for those who have already planned on buying goods and services by 31st march, as they can claim LTC tax deductions against the money spent, said the experts. However, they caution against rushing to spend just to save tax. Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners said. “Private sector employees, unlike central government employees, who get LTC benefits over and above their CTC, have the option of getting the post-tax amount if they are not able to provide the bills. Therefore, it won’t make sense for them to spend three times the money just to save taxes.”
“But for central government employees, it’s a good proposition as they wouldn’t have been able to claim the LTC benefit otherwise as traveling will be difficult in these times,” he added.
There many products which attract GST which is of at least 12%. Therefore employees planning on spending money on these foods and services have the option to claim LTC benefit as well, Homi Mistry stated. In the first year of the next block, the employees have the option to claim LTC. The exemption for LTC is allowed to an employee to travel two times within a block of four calendar years. The block applicable for the current period is calendar years 2018 to 2021.
Rituparna Chakraborty, co-founder and executive vice-president of TeamLease, a human resources company stated: “In case an employee is unable to claim LTC exemption twice in a block of four years, he can carry forward one journey to the next block. However, the carried forward LTC eligibility has to be utilized in the first year of the next block. For example, in case an employee has claimed LTC only once in the four-year calendar block of 2018 to 2021, he can claim LTC for travel undertaken in the first year of the next block, or in 2022. The employee can then claim two more journeys between 2023 and 2025. Also, the exemption is restricted for the expense incurred on domestic travels only.”
It’s okay for the scheme if the ideal plan is to buy goods and services in the prescribed time limit. But it is recommended not to overspend just to save taxes.
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