Understanding LTA in Salary: Can It Be Monthly and More Employee-Friendly?

I want to know if we can add LTA into the monthly salary breakup. In our company, they have divided the salary into Basic, HRA, Conveyance, Medical, LTA, and Special. Is this correct? As per income tax rules, we can claim LTA only twice in 4 years. Otherwise, can we remove LTA and put the LTA amount into Special, or is there any component that is more favorable to the employee?

LTA Payment and Tax Exemption

In general practice, LTA is paid once a year. As you rightly pointed out, LTA is exempt from tax if it is claimed twice in a block of four years. If you intend to pay this on a monthly basis, then the purpose of giving exemption is lost. So, as you have pointed out, it will be beneficial for employees if it is given to them under a different earning head which will be exempt from tax.

Alternative Tax-Exempt Benefits

For example, you can consider setting up a superannuation scheme for your employees wherein 15% of the employee's basic salary is deposited with LIC OF INDIA. This amount accrues in the employee's account and gets paid as per rules and regulations framed by your company. This is not taxable at the hands of the employee, and the employer is also exempt to the extent of the contribution to the superannuation fund. The employee gets a monthly pension upon attaining superannuation or resigning from employment (if such a clause is permitted by the employer).

Regards,
M.V. KANNAN

Thank you for your prompt response. However, in our company, the management is not prepared for superannuation fund contributions. They only wish to remove the LTA option and create another category for salary components. I am awaiting your response.

Thanks and Regards,
Sheela