When and how to claim LTA to maximise tax benefitsKhyati Dharamsi, ET Bureau Mar 14, 2011, 03.36am IST

If you were planning a trip to the hills this summer, it's a cinch that you will enjoy it more after reading this story. For, we shall tell you how you can reduce your taxable income even as you have fun with your family. Yes, you can do this by availing of the leave travel allowance (LTA) that is part of your salary. "The amount paid by an employer to an employee for travelling anywhere in India, along with his family, is exempt from tax subject to certain provisions," says Sunil Talati, former president of the Institute of Chartered Accountants of India.

Read on to know how you can make the best use of your LTA.

What you are entitled to

You may be entitled to a high LTA, but only the expenses you have incurred on travelling with your family within the country can be claimed as exemption under Section 10(5) of the Income Tax Act. Expenses on hotel rooms, sightseeing, food, etc, cannot be included. This means that you cannot claim exemption for the money you spent on your stay at a five-star hotel.

The family can comprise your spouse, two children, brothers, sisters and parents, if they are dependent on you. "You cannot claim for more than two children unless the second birth has resulted in multiple children," says chartered accountant Paras Savla.

Don't think you can outsmart the taxman by taking a circuitous route to reach your destination. Expenses can only be claimed for travel by the shortest possible route. "Though it's difficult to crosscheck the route, the claim amount should reflect this. So, you can go from Tamil Nadu to Kerala, but you cannot go to Delhi from Tamil Nadu and then take a flight to Kerala to claim your expenses," says Rajesh Srinivasan, leader, global employer service, Deloitte India.

The tax exemption is limited to the fare component, which is economy class air fare, first class AC rail fare or first/deluxe class bus fare. However, if there is no public transport, you can hire a taxi or rent a car and claim for expenses equivalent to first class AC rail fare.

While most companies ask their employees to furnish proof of travel, such as boarding passes, tickets and rental receipts, some don't. Srinivasan says, "The Supreme Court has stated that the employer does not need to collect bills from his employees as proof to make the allowance tax-exempt." Your employer will certify the LTA exemption in Form 16.

When you can claim

Though you are paid the travel allowance in your salary every financial year, it can be claimed for only two journeys in a block of four calendar years, which are fixed. "The block of four years are considered according to the Income Tax Act and the current one is from 2010 to 2013," says Mumbai-based chartered accountant Mehul Sheth. "So, if you are eligible for an annual LTA of Rs 20,000, you can claim exemption up to Rs 40,000 in a block. You cannot claim exemption of Rs 2 lakh even if you have actually spent that much," he says.

You can claim for two journeys in the same year, provided you make no more LTA exemption claims for the rest of the block. "The Act says twice in a block of four years," says Srinivasan.

If, however, you have not been able to travel during a block, you can carry forward the LTA exemption to the first year of the next block. This means you can claim for even three journeys. "One can claim for three journeys subject to certain conditions. It is allowed for the first year of the new block, when you have carried forward exemption from the previous block. So, in the present situation you can claim in the first year of block that is 2010-2011, for a journey of previous block that is 2009. Plus you can make two more claims for this block (2010-2013)," says Srinivasan.

If both you and your spouse are eligible for LTA, you can claim exemption for separate journeys. What if there are only two journeys undertaken by the family in a block? You could consider dividing the expenses. "The husband and wife can split the cost of the journey and claim them separately. However, there should be no duplication," says Talati. So, the husband can book the air tickets for one way and the wife can do so for the return journey.

Five facts about Rajiv Gandhi Equity Savings Scheme

Narendra Nathan, ET Bureau Feb 4, 2013, 12.49PM IST

(The Rajiv Gandhi Equity…)

The Rajiv Gandhi Equity Savings Scheme (RGESS) has been officially notified and will be launched by Finance Minister P Chidambaram this week. ET Wealth explains what you should consider before opting for this tax-saving option available under Section 80CCG.

Who is eligible?

RGESS is available to all resident individuals whose gross total income is less than Rs 10 lakh and who are investing in equity for the first time. A first-timer has been defined as the one who has not opened a demat account as a 'first holder' before the notification date of 23 November 2012, even if his name appears in a joint demat account opened before this date. The investor who has opened a demat account as first holder before the notification date but has not bought any shares or traded in the futures and options segment will also be considered as a first-time investor.

How can you get tax benefit?

To avail of tax deduction, an investor has to open a new RGESS designated demat account or designate for this purpose his existing demat account, where no trading has taken place before 23 November. He needs to submit a declaration in Form A, certifying that he has not traded before 23 November 2012, to the depository participant, who in turn forwards it to the depository for verifying the status and designate him a new retail investor. He can then start buying the eligible securities, which include stocks from the BSE-100 or CNX 100 index. The listed shares of

navratna, maharatna and miniratna public-sector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than Rs 4,000 crore, are also eligible for investment. One can avail of tax benefit by investing in the eligible mutual fund schemes too.

What's the lock-in period?

Unlike other tax-saving schemes, the lockin period here is split in two. The first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible and he can sell, but has to buy other eligible securities with the proceeds. All eligible securities in an RGESS designated account are automatically subject to the lock-in periods. If an investor wants to buy more designated shares and keep these outside the lock-in clause, he has to give a declaration in Form B within a month of the transaction date. One can also keep other securities in this account without the lock-in clause. The tax benefit under Section 80CCG is withdrawn if these conditions are violated, but if the changes are due to involuntary corporate actions it's not affected.

What are your savings?

While there is no restriction on investment, only Rs 50,000 is considered for tax purposes. Of this, only 50%, or Rs 25,000, is allowed as deduction. Since RGESS is for people with income less than Rs 10 lakh, they will fall in the 10% or 20% tax bracket. The maximum savings under this will be Rs 5,000 for people in the 20% tax bracket and Rs 2,500 for those under 10% (beyond the Section 80C benefits). Besides, the savings are only for the first year, not subsequent years. So, those who don't have enough money or time to invest Rs 50,000 in 2012-13 should consider postponing it to 2013-14.

Stocks or mutual funds?

Since direct investment in equity needs expertise and first-time investors are unlikely to have it, they should refrain from investing directly in the market. The risk is also high because Rs 50,000 is not enough to create a well-diversified portfolio. A better option is to go through the mutual fund route. As of now, several exchange traded funds (ETFs) have been declared as eligible securities and investors can invest in these. Various mutual fund houses have also started filing offer documents for eligible schemes with Sebi, while their new fund offerings (NFO) too are expected soon.

How to save tax in 2013: Your guide to planningBabar Zaidi, ET Bureau Jan 7, 2013, 09.46AM IST

The most important rule of tax planning is that it is no different from financial planning. The Section 80C offers a wide range of options, each suited to a different need. Choose an option that fits into your overall financial plan, not because it offers good returns or your brother-in-law is selling it.

It is easier to identify the best option if you do not leave tax planning for the dying days of the financial year. You get a rough idea of how much you need to save at the beginning of the fiscal year.

Allocate your Rs 1 lakh limit across different Sec 80C options as dictated by your financial goals, following the same principles of asset allocation that apply to other investments.

Taxpayers can take a leaf out of Ramakant Mishra's book. The Belapur-based PSU bank employee wants to save for the education and marriage of his two daughters.

Given that these goals are a good 15-20 years away, he has been advised to invest in diversified equity funds. So, he has started a monthly SIP of Rs 3,000 in an ELSS fund, thus aligning his tax-saving investment with a long-term financial goal. "I chose to put money in the ELSS fund because it serves a twin objective in my financial plan," says Mishra.

ARE YOU READY FOR RISK?

That's good thinking on Mishra's part, but allow us to slip in a caveat here. ELSS funds invest in stocks and carry the same risk as any other equity fund. In fact, the risk is greater because you can't touch the investment before the three-year lock-in period.

Besides, it is best to invest in equity mutual funds in monthly driblets. Investing a large amount at one go may have been a good strategy when the Nifty was floundering at 2,700 levels and a PE of 11-12 in early 2009. But it would be hara-kiri to do so when the index has crossed the 6,000 mark and is trading a tad above its long-term average PE of 18.

Also Read: Six tax goof-ups to avoid

For small investors, this is the time to be fearful rather than greedy. They should not attempt to get on to the ELSS bus now—at least not in a lump-sum mode.

In the same context, the newly launched Rajiv Gandhi Equity Saving Scheme is best left untouched. It gives additional tax deduction to first-time investors who want to enter the equity market.

Instead of taking this route, which will give them only 50 per cent deduction, the ELSS funds are a better option. We have identified six of the best ELSS funds for you. These may not be the best performing funds, but have a stable track record. If your risk profile allows you to invest in these funds, stagger your investments across 2-3 SIPs between now and 31 March.

HOW NOT TO INVEST IN ULIPs

The same logic applies to investments in Ulips. Putting a lump sum in equity through a Ulip is risky. This is especially true in case of single premium plans, where you put a huge amount in the market at one go. The good thing is that unlike the ELSS funds, Ulips allow you an alternative asset allocation model.

If you are paying a large premium, put your money in the debt option instead of the equity fund in the Ulip. You can then gradually shift small amounts to the equity option. Most insurance firms allow 10-12 switches free of charge in a year.

The new Ulip, introduced after Irda's 2010 guidelines, is more customer-friendly and transparent. Unfortunately, however, the capping of the charges has led agents to avoid these low-commission plans. In 2011-12, barely 15 per cent of the total premium from new policies came from Ulips, down from almost 75 per cent in 2007-8.

Admittedly, these market-linked insurance plans are not the best investment option in the market today. Other investments can yield the same results at a lower cost. ELSS funds are a simpler and cheaper option for wealth creation. You can save tax through 5-year bank FDs or PPF as well, and a term plan gives you a bigger insurance cover at a lower price.

Also Read: Choose an insurance policy like you would a life partner

What Ulip bashers overlook is the convenience of bundling everything into a single product. You get equity exposure, tax deduction, tax-free income and can switch your allocation as per your reading of the market. Even so, a Ulip should not be your first insurance policy. This investment-cum-insurance plan should be bought only if you have purchased enough insurance (roughly 5-6 times your annual income) with a pure protection term plan.

Similarly, avoid putting large sums into your NPS account, especially if you have an aggressive portfolio. Even though the NPS follows a prudent asset allocation, it's best not to get caught on the wrong foot.

YOUR SECTION 80C CHECKLIST

Six tax goof-ups that planning can help avoid

By Manshu VermaNOT INCLUDING ALL ELIGIBLE DEDUCTIONSMany taxpayers don't know about all the possible options under Section 80C. Besides the investments, there are several expenses that are also eligible for deduction, such as school fees of children, housing loan repayment and stamp duty and registration charges paid for a house. In fact, you could have already exhausted your Rs 1 lakh limit and don't need to make any further tax-saving investments. Turn to page 16 to know how much more you need to put in tax-saving investments this year.

NOT AVAILING OF OTHER TAX DEDUCTIONSMost taxpayers do not look beyond Sections 80C and 80D when they are calculating their tax liability. If you or a dependant suffer from any of the 8-10 specified diseases or physical disability, you can claim a deduction of up to Rs 60,000 under Sections 80U, 80DD and 80DDB. The donations you make to specified charities are also eligible for deduction under Section 80G, while education loan interest is fully tax deductible under Section 80E.

BUYING INSURANCE TO SAVE TAXThis is the most common tax folly that Indians make. Life insurance is absolutely necessary and should be taken by everybody. However, the objective should be protecting your family's financial future, not save a few thousand rupees in tax. See tax saving only as a discount on the premium, not as the purpose of buying insurance. When you buy life insurance, you enter a long-term recurring commitment. Getting out of it is a costly affair because you end up paying surrender charges. If you choose a traditional insurance plan, the high premium could prevent you from investing for other financial goals.NOT TAKING TAXABILITY INTO ACCOUNTEach tax-saving investment gets a different tax treatment. The interest earned on the PPF is tax-free, but income from fixed deposits, NSCs and Senior Citizens' Saving Scheme is fully taxable. This is why the 8.8% offered by the PPF is a better option than the 9% offered by a fixed deposit. Insurance policies offer tax-free income, but the pension received from an annuity plan is taxable. Keep in mind the taxability of income when you invest in a tax-saving option.INVESTING LUMP SUM IN EQUITYThis usually happens if the taxpayer compresses his entire year's tax planning into the last few days of the financial year. If you invest a large sum in an ELSS fund at one go, you are taking a big risk. Similarly,

investing a lump sum in the equity option of a Ulip may be a bad idea. Equity investments should be staggered across the year so that you are not caught on the wrong foot.

IGNORING THE LOCK-IN PERIODAll Section 80C investments come with a lock-in period, ranging from three years for ELSS and extending till retirement for the NPS. Be sure to match the lock-in period with your requirement before you make the investment. Also, do a bit of research before you invest. The PPF, for instance, has a 15-year lock-in term, but this progressively comes down over the years. In the 14th year, the lock-in period is only one year. Besides, you can make partial withdrawals after five years.

(Manshu Verma writes a personal finance blog OneMint.com. He can be reached at manshu@onemint.com)