Calculation of Tax Exemption on LTA

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.

Table 1

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.

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 a national carrier (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.

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 (http://courtnic.nic.in/supremecourt/temp/ac%2099305p.txt).

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 (Oct 2013), 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.

Note:

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.

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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