Spend ₹3 Lakh to Save ₹30,000? New Govt Employee Schemes, Decoded

Is government really pumping money into the system with LTC and Festival Advance schemes? The math, explained.

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Video Editor: Sandeep Suman

Finance Minister Nirmala Sitharaman came up with a plethora of announcements on 12 October. Among which, were two big announcements for government employees – the LTC scheme and the festival advance scheme.

The schemes made the front page of almost all leading newspapers, who headlined it somewhat like this:

  • "Government targets Rs 1 lakh cr spend by March-end, announces new LTC voucher, festival advance" - The Indian Express
  • "Government to spend 37,000 crore, give SOPs to spur festive demand" - The Times of India
But, Business Standard gave a gist of Sitharaman’s ‘festive stimulus’, by calling it “Nirmalanomics: Demand gain without fiscal pain.”

So, is the government really pumping that much money into the system? When you look at these schemes clearly, the employees don't really stand to gain much. The government isn't really infusing much stimulus into the economy, and the schemes themselves are twisted, complicated and frustratingly convoluted for the employees.

To understand these announcements better, let's dissect them:

WHAT'S THE LTC SCHEME?

To understand this scheme, let’s take a look at a basic Math problem:

A shopkeeper tells you that if you buy a packet of biscuits worth Rs 100, you will have to pay Rs 30 tax on it. But, the Rs 30 will be waived off if you buy other goods worth Rs 300. What will you do? Will you spend those extra Rs 200 from your pocket to save Rs 30 on tax?

That's exactly what the LTC scheme is.

Central government employees get leave travel concession (LTC) once every four years, to two destinations. Now, the air or rail fare for these trips is reimbursed as per the employee's pay scale/entitlement.

According to the finance minister, since many employees will not be able to travel and avail the LTC in the 2018-21 period, due to the COVID-19 pandemic, the LTC scheme is being tweaked.

In exchange for one LTC during 2018-21, employees will now receive cash payment, without them actually having to travel. There will also be full payment on leave encashment and the fare will be paid as per three slabs, depending on the class of your employment or your employee status.

WHAT’S THE CATCH?

An employee opting for this scheme will have to buy goods and services with that money worth three times the LTC fare, before 31 March 2021. The money is to be spent on goods with GST of 12 percent or higher – like TV, refrigerator, etc.

For example, consider I am a government employee entitled to an LTC of say Rs 1 Lakh and I fall in the 30 percent tax slab, according to my income. The tax on my LTC, according to 30 percent, is Rs 30,000. What choices do I have?

  • I produce tickets of my travel to claim it as a tax-free allowance. If I don't travel and can't produce a ticket, I will have to pay Rs 30,000 in taxes.
  • If I don't want to pay those 30,000 in taxes, I will have to spend three times of Rs 1 lakh, that is Rs 3 lakh on purchasing things with GST 12 percent or higher and can produce the bills to claim so. Only digital payments will be allowed and employees will have to provide the GST invoice.

Moral of the story? In order to save tax on the LTC, if you are not able to travel anywhere due to the COVID situation, you have to spend thrice the amount.

Also, this scheme is okay for people who have that kind of savings to spend on, before festivals. But, considering that this year has been a dampener because of pay cuts, you never know! And, add to it the possibility of employees generating fake invoices.

HOW WILL LTC SCHEME BENEFIT THE GOVERNMENT?

Now, through this plan, the government expects additional demand creation of around Rs 19,000 crore, only from central government employees. And, even if 50 percent of state government employees opt for this scheme, it will generate another Rs 9,000 crore.

WHAT'S THE FESTIVAL ADVANCE SCHEME?

Second is the Festival Advance Scheme. The government has restored festival advance as a one-time measure till 31 March 2021, after it was abolished following the recommendations of the 7th Pay Commission.

Under this, all central government employees will get interest-free advance of Rs 10,000, which the government will recover in 10 instalments from their salaries.

WHAT’S THE CATCH?

The advance will be given in the form of a pre-loaded Rupay card. This amount cannot be drawn as cash from an ATM but can be spent anywhere at point-of sale.

HOW WILL FESTIVAL ADVANCE HELP GOVERNMENT?

The government expects to disburse at least Rs 4,000 crore under the scheme and if all states provide a similar advance, another Rs 8,000 crore is likely to be disbursed. This is expected to generate consumption demand ahead of festivals like Dussehra and Diwali.

When you look at both of these schemes, these figures sound big and so do the headlines. But, there is very negligible stimulus or additional expenditure from the government's side.

What the government is basically doing is giving you advance from its treasury, only to recover it later, or offering you a chance to save taxes only by spending more from your savings.

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