Claim LTA this year rather than next

If you are planning to put off your claim on the tax rebate on leave travel allowance (LTA) for next year or the year after, think again. Claiming the rebate in 2007-08, the current financial year, will be more beneficial. As the tax rate will effectively come down substantially from 2008-09, following the Budget hike in exemption limits and tax slabs, the tax incidence on your LTA will also be lower from next year. That means you save less too. If you don’t claim the tax benefit this year, you will pay 30% as tax on your LTA if your total income, including LTA, is more than Rs 2.5 lakh. Therefore, claiming the tax benefit will mean you save that amount.
However, next year, the tax incidence on your LTA portion will be only 10% if your income, including LTA, is between Rs 1.5 lakh and Rs 3 lakh and 20% if it is between Rs 3 lakh and Rs 5 lakh. It’s only if your income exceeds Rs 5 lakh that the tax rate becomes 30% on the portion of income above Rs 5 lakh. Income tax exemption on LTA can be claimed in any two years out of a block of four years specified by the I-T department. According to a tax expert, at present, the four specified years are 2006, 2007, 2008 and 2009. Out of these four years, you can claim the tax benefit in any two years. Normally, people tend to claim the tax benefit in the later part of the four-year period, assuming that their salary and LTA is likely to be higher in those years. This helps them to save more tax. As the tax rates will come down from 2008-09, the benefit of claiming income tax exemption on leave travel allowance will also be low. For instance, take a person who has an annual salary of Rs 4 lakh per annum (Rs 33,333 per month) and gets LTA of Rs 1 lakh every year. He can claim tax exemption on LTA in any two years out of the block of four years starting from 2006. Even if, he has claimed the income tax exemption on LTA in 2006-07, he can claim it again in 2007-08. But in that case, he cannot claim it for the next two years. If he decides not to claim the income tax exemption this year, he will have to pay tax of Rs 30,900 on the LTA of Rs 1 lakh. But, if he claims the benefit, he can save the amount. Of course, this will mean he can no longer claim the benefit next year, but the tax on his LTA next year would be only Rs 20,600. In effect, therefore, by taking the rebate this year rather than next year, he will make a net tax saving of Rs 10,300 over the two years. In fact, the benefit will be even higher in percentage terms if one’s annual income is lower, say in the range of Rs 2.5 lakh. Take a person with an annual taxable income of Rs 2.5 lakh and LTA benefit of Rs 50,000. The tax incidence on the LTA in 2007-08 would be Rs 15,450, which he can save if he claims the I-T exemption on that. But, in 2008-09, the tax incidence will be only Rs 5,150. Therefore, it is better to claim the tax benefit this year and pay tax next year.