Last Updated on January 2, 2026
The Leave Travel Allowance (LTA) is a relatively popular salary benefit offered by employers to help employees cover travel costs during their leaves. Most employees, however, do not understand how LTA is taxed, particularly when it is encased rather than for real travelling. One wrong assumption is that the encashment of LTA is tax-free. As a matter of fact, the Income-tax Act, 1961, draws a distinct line between LTA exemption and LTA encashment, and a wrong interpretation may lead to inaccurate tax planning and compliance issues.
The blog explains the taxation of encashment of Leave Travel allowance, the legal provisions, the exemptions that apply, and their implications, in plain language.
What is Leave Travel allowance (LTA)?
Leave Travel Allowance is an allowance an employer gives an employee to cover travel expenses incurred during leave within India. It is regulated by Section 10(5) of the Income-tax Act, 1961, with the help of Rule 2B of the Income-tax Rules, 1962. Only in the case when the employee indeed travels and satisfies certain requirements, an LTA exemption will be permissible.
LTA is included in the salary plan of the employee, and it is given out as a reimbursement of travel costs or as a fixed allowance.
Difference between LTA Exemption and LTA Encashment
One has to know the difference between LTA exemption and LTA encashment. The exemption LTA will only be allowed in cases when the employee travels and presents a legitimate confirmation of travel. Conversely, LTA encashment is the case when the worker is not on the road but instead gets the LTA amount in the form of cash.
Whereas LTA exemption is partially tax-free, LTA encashment is fully taxable in the hands of the employee.
Encashment of Leave Travel Allowance Treatment Tax
In a situation where an employee fails to avail travel but opts to cash the amount in LTA, the amount he or she receives will be treated as taxable salary. Section 10(5) does not provide an exemption for LTA encashment.
The Income-tax Act expressly offers an exemption on actual travel expenses incurred with limits and conditions. Any sum received without travelling is not forgivable and is included in the employee’s total salary.
Thus, taxation of LTA is based on the rate of income tax that applies to the amount of the slab of income tax of the employee.
Laws that Regulate LTA Taxation
The tariff of LTA and the mode of its encashment are regulated by:
- Section 10(5) of the Income-tax Act, 1961
- Rule 2B of the Income-tax Rules, 1962
The emission of such provisions is limited to travel fare that is incurred during local travelling, like airfare, rail fare or public transport fare. It does not cover hotel cost, food, local transportation or sightseeing cost. Encashment does not entail travelling, and thus it is entirely exempt.
Employer in the encashment taxation of LTA
Under payroll and compliance provisions, employers are supposed to deduct TDS on encashed LTA amounts of employees. If an employee is unable to provide valid travel proofs within the stipulated time frame, the employer will have to treat the LTA amount as taxable salary and deduct TDS on it.
Failure to deduct TDS on the taxable taxpayer’s LTA encashment could subject the employer to interest and penalties under the Income-tax Act.
Common Scenarios of LTA Encashment
- Not Given LTA Not Because of No Travel: If an employee fails to travel within the allowable block period but still earns LTA, he/she will be taxed on the full amount. Filing the income tax return does not entitle you to any exemption.
- LTA Received and Travel Proof not submitted: Where such travels are made, and no valid proof is provided to the employer, the LTA amount will be taxed by the employer. When filling out the return, the employee may claim an exemption if the actual travel conditions are met and they have evidence to support it.
- LTA Encashment at Year-End: In most cases, employers allow LTA encashment at year-end if the employee has not travelled. This encashment is taxable in full and included in the salary income.
LTA Encashment vs Leave Encashment
Encashment of LTA must not be mistaken for leave encashment. Section 10(10AA) deals with leave encashment, the payment made for days of leave that have not been utilised. Contrary to LTA encashment, leave encashment can be partially or fully tax-exempt, depending on whether it is paid in the course of employment or at retirement.
However, LTA encashment is not exempt, whether it is paid or not.
Effect of New Tax Regime on LTA Encashment
Most exemptions, such as the LTA exemption, are not at all under the new tax regime under Section 115BAC. Nonetheless, as LTA is taxable even under the old regime, its tax treatment is the same in both regimes. The whole LTA encashment remains taxable salary income.
Common Mistakes to Avoid
Many taxpayers mistakenly believe that LTA encashment is tax-free or tax-exempt in some respects. Exemption claims that do not involve travel and reporting of false information may attract tax bills and fines. The other widespread mistake is to confuse LTA encashment with leave encashment and make a false claim of exemption.
Another thing employees should not do is claim the LTA exemption only for domestic travel and the fare, not for other travel expenses.
Conclusion
The encashment of the Leave Travel allowance is subject to full taxation under the Income Tax Act 1961. Section 10(5) exemption for actual travel expenses is limited to domestic travel and does not include encashment by LTA. To avoid an undue tax burden, employees should plan their salary aspects and know the distinction between LTA exemption and encashment. The employers, on the other hand, have the obligation to make sure that the TDS deduction and payroll are correct. Clarity in LTA taxation supports proper tax planning and helps avoid conflicts with tax officials.
