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September, 09th 2010

The Direct Taxes Code (DTC) Bill has brought some bad news for salaried employees eligible for leave travel allowance (LTA). The proposed tax laws silence on the allowance is taken as an indication that the LTA may now come under the tax net. Currently, LTA is deducted from the salary to arrive at the gross taxable income of a salaried employee.

Some senior finance ministry officials, however, have a different story that says revenue officials who worked with very tight deadlines while drafting the Direct Taxes Code Bill, missed LTA while drafting the final Bill and could not make-up for the fault by issuing a notification regarding the LTA.

The DTC Bill presented by the finance ministry in Parliament last month had no mention of LTA among the deductions to be made to compute the gross taxable income of an employee. According to interpretation by tax experts, the taxable income of a salaried employee will now also have the LTA component according to the DTC Bill in its present format.

The unintentional error, if so, may get the DTC drafters ire of their own fellow babus with almost 10-15% of the annual income of senior government official forming the leave travel allowance.

Clause 23 of the DTC Bill mentions deductions that have to be made from the gross salary for computation of income from employment that would be taxable. The clause mentions a host of allowances like the house rent allowance, travel allowance for commuting to office and a pension fund contribution by the employer. However, it says nothing about LTA.

Experts feel that the silence of the code on the LTA may mean that the item would be taxed.

The Bill does not specifically say anything about LTA deduction. In its current form what we understand is that the allowance is taxable, Sonu Aiyer, partner, Ernst & Young told FE.

However, she also added there could be a notification or circular in the future that the government may issue to clarify that the allowance is still out of the tax net.

The Bill may not become the final law in its current format as after being tabled in Parliament it will be vetted by various committees including the parliamentary committee where some changes or additions may be suggested and may also be taken into account. The Bill will be introduced from April 2012 and the first tax return any one can file will only be after March 2013.

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