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Income Tax Exemption on Gratuity and LTA

Among the many tax exemptions available for salaried individuals are LTA and gratuity tax exemption. Leave travel allowance (LTA) is paid to the employee for covering travel with family within India and is exempt from tax only if it is claimed as reimbursement. Plain LTA paid to employees as an allowance will be taxed as salary. That has to be kept in mind when structuring the individual’s package. Gratuity is paid to employees when the employee leaves the job after completion of 5 years in service. Gratuity is not liable to be paid if the employee quits the job before the completion of 5 years from the date of joining or confirmation (as the case may be). Both Gratuity and LTA are normally shown as part of the cost to company (CTC) as it is a cost to the employer. Let us also understand the tax benefits of LTA and how to show gratuity in income tax return. Estimate your retirement benefits with gratuity calculator. Calculate your gratuity amount based on your salary, years of service, & interest rate.

Getting your basics of gratuity right..
Most companies use gratuity as a form of tax-free compensation to employees who stay with them for more than 5 years. Gratuity is payable at the time of retirement or at the time of resignation from the company. The time limit of 5 years will not apply in case the concerned person dies or becomes disabled before the completion of 5 years in services. In such cases, the gratuity will still be payable despite not completing 5 years in service.
Remember that gratuity is a statutory right of every employee working in an organization employing more than 10 people. However, this only applies to permanent employees and does not cover interns and temporary employees. There are 3 issues to understand about gratuity..

When the individual is employed by the central government, state governments or local authorities, then the entire gratuity received in the event of death or retirement is fully exempt from tax with no upper limit.

In case of employees covered under the Payment of Gratuity Act, the gratuity on completion of 5 years is exempt from tax to the extent of 15 days salary for every completed year of service. In this case, the total gratuity up to an upper ceiling of Rs.10 lakhs received by you will be entirely tax-free in your hands. Anything above that will be taxed as income in the year of receipt of gratuity.

In the event of the death of the employee, the gratuity will be paid to the nominee or to the legal heir. However, there is an exception to this rule for payment of gratuity. Even if the employee has completed 5 years of service but is terminated for misconduct or malfeasance, then the employer has the right to reject the payment of gratuity to that employee.

Tax benefits of LTA and how to make the best of it..
Leave travel allowance (LTA) is only paid to cover the travel expenses of the individual and immediate family to any destination within India. The following are the key conditions pertaining to payment of LTA…

LTA, to be exempt, can only be claimed for self, spouse and up to 2 children. One can also claim LTA on behalf of substantially dependent parents or siblings.

To be eligible for LTA, the employee must be on leave during the period of travel. LTA only covers the point-to-point travel to and from the farthest point covered. Incidentals like cab fares, food, hotels etc cannot be claimed under LTA.

LTA exemption can only be claimed twice in a block of 4 years. Effectively, every alternative year you can go on a holiday and claim the up-down fare for yourself and your family.

The LTA exemption is only allowed in case of flight, train or other modes of public transport. You cannot claim LTA exemption if you travel by private car, chartered buses etc.

The LTA exemption can only be claimed for the shortest route between 2 farthest points. Any break-journeys are not considered for LTA exemption.

The importance of LTA in your income structure..
The purpose of exemption for LTA is two-fold. Firstly, it is intended to encourage people to actually take time off from work and spend with family. It is expected to spur the productivity of the individual and help them come back more energised. Secondly, the LT A is structured as a reimbursement so that the individual gets tax benefits for actual amount spend. Remember, LTA claimed without adequate travel proofs during the holiday period is not tax-exempt. All proofs have to be submitted to the employer in originals so make it a point to document your entire travel and keep proofs where required.

There is an additional point to be understood about LTA. Typically, employees have the tendency to produce false proofs without travelling. That is not advisable. Firstly, if it is found out it could be a black mark in your confidential file. Secondly, you have to forfeit the tax exemption claim and you will have to pay the additional tax with penalty.

The purpose of the LTA and gratuity is to structure your package in a more tax-efficient manner. You can actually make the most out of it.

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