Section 10(5) of the Income Tax Act

Salaries employees receive various types of allowances as a part of their salaries. These allowances are a part of their taxable incomes because they are classified as income from salaries. However, the Income Tax Act, 1961, contains many provisions that offer conditional exemptions and deductions on all or part of these allowances. One such provision is section 10(5) of the Income Tax Act.

It contains the conditions that employees must meet to claim an exemption for the Leave Travel Concession (LTC) or the Leave Travel Allowance (LTA) they receive as a part of the salary. In this article, we delve into the details.

What is the meaning of Leave Travel Concession (LTC)?

Leave Travel Concession, also commonly known as Leave Travel Allowance (LTA), is a type of allowance included in an employee’s salary. The employer offers this allowance to help employees meet the cost of travel undertaken during periods of leave. Some employers may offer this allowance as a reimbursement instead. The LTA is typically included in the employee’s cost-to-company (CTC).

Provisions of section 10(5) of the Income Tax Act

Since LTA forms a part of the employee’s salary, it is considered to be a taxable income. However, section 10(5) of the Income Tax Act lays out certain conditions for claiming LTA exemption. If an employee meets the conditions specified in this section, they can deduct the eligible amount of LTA, thus reducing the total taxable income and the tax liability thereon.

The provisions of section 10(5) include the conditions that need to be fulfilled by an employee to make them eligible for LTA exemption. The conditions define the types of travel that are considered eligible, the geographical boundaries for such travel, the number of trips considered and the expenses eligible for deduction.

Conditions for availing the LTA exemption

Now that you know what the provisions of section 10(5) of the Income Tax Act cover, let us take a closer look at the conditions laid out in this section.

The travel must be undertaken during a period of leave

Only those travels that an employee undertakes during a period of leave from their job are considered under section 10(5). Any trip taken for business purposes is not considered eligible for LTA exemption.

The travel must be within India

Only travelling within India is considered eligible as per the provisions of section 10(5). Expenses incurred during foreign trips do not fall within the purview of section 10(5) of the Income Tax Act.

The exemption is available for two journeys in a four-year block

Not all eligible domestic travels undertaken during a period of leave can be considered for the LTA exemption. As per section 10(5), only two journeys are allowed for the LTA exemption in a block of four years, as determined by the government.

The exemption is only for the incurred travel expenses

Only travel expenses actually incurred on eligible journeys are considered under section 10(5) of the Income Tax Act. Other secondary expenses like food, accommodation and shopping are not allowed to be deducted.

The exemption is only for eligible family members

Only travel expenses incurred on eligible journeys by the employee and the members of their immediate family — like spouse, children and fully dependent parents or siblings — are eligible for the exemption under section 10(5).

Key aspects of section 10(5) of the Income Tax Act

To understand the nuances of section 10(5) of the Income Tax Act, let us discuss a few key aspects of this provision, such as the meaning of ‘family,’ the modes of travel recognised and what happens to unused LTC, among other things.

Definition of ‘family’

For the purpose of section 10(5) of the Income Tax Act, the term ‘family’ includes the employee, their spouse and children, and any wholly dependent immediate family members like parents and siblings. In-laws, cousins and distant relatives are not covered under the definition of the term.

Block of four years

As mentioned above, only two journeys in a block of four years are allowed for the exemption under section 10(5). This block of four years is decided by the government. The current block (as of July 2024) is from 2022 to 2025. The next block will be decided accordingly. This means you can only claim exemptions for two journeys from 2022 to 2025.

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Recognised modes of travel

Travel by road, rail and air are all recognised under section 10(5) of the Income Tax Act. That said, only travel-related expenses can be considered for the LTA exemption. Any other expenses incurred during the journey do not fall within the purview of this section.

Unused LTC

Any unused LTC can be carried forward one time only, to the next block of four years. However, the benefit carried forward should be utilised within the first calendar year of the new four-year block. So, for example, if you do not claim your exemption in the current block, you can carry it forward and claim it in 2026.

Tax exemption limits

The amount exempted under section 10(5) is limited to the expenses actually incurred during the eligible journeys. For example, say you receive Rs. 50,000 as LTA per annum, but you incur eligible travel-related costs of Rs. 30,000. In this case, only Rs. 30,000 can be claimed under section 10(5). The remaining Rs. 20,000 will be taxable as your income.

Conclusion

This concludes our guide on section 10(5) of the Income Tax Act. If you are a salaried employee receiving leave travel concession as a part of your salary, you now know how you can use the provisions of section 10(5) to potentially reduce your tax liability. Additionally, you can also curate your investment portfolio to include investments that can simultaneously help you save tax and achieve your financial goals.

One such option is investing in mutual funds, particularly equity funds, which can potentially help create wealth over the long term. Any long-term capital gains earned on such mutual fund schemes are exempt from tax up to Rs. 1.25 lakhs. To tap into this benefit, you can compare mutual funds on the Bajaj Finserv Mutual Fund Platform and choose those schemes that align with your risk-return preferences.

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