New Delhi, Government on Thursday extended tax exemption on cash allowance of LTC fare paid in lieu of deemed actual travel to non-government employees in a bid to encourage the private sector to support government initiative to generate demand in the economy.

The fresh stimulus measure would allow non-government employees as well to claim tax free cash allowance from their employers if a LTC scheme similar to one in the government sector is included in their working contract.

"In order to provide the benefits to other employees (i.e. non-Central Government employees) who are not covered by the above mentioned OM (the October 12 decision for central government employees) it has been decided to provide similar income-tax exemption for the payment of cash equivalent of LTC fare to the non-Central Government employees also," a finance ministry statement on the proposed changes said.

"Accordingly, the payment of cash allowance, subject to maximum of Rs 36,000 per person as Deemed LTC fare per person (Round Trip) to non-Central Government employees, shall be allowed income-tax exemption subject to fulfilment of conditions...," the statement added.

Like in the case of central government employees, the exemption to other category will only be extended if an employee exercises an option for the deemed LTC fare in lieu of the applicable LTC in the block year 2018-21. Also, the employee will have to spend three times of the value of the deemed LTC fare on purchase of goods/services which carry a GST rate of not less than 12% from GST registered vendors through digital mode. The said spending will have to be made during the period from the 12th of October, 2020 to 31st of March, 2021.

The tax exemption and the amount of cash equivalent of LTC will reduce proportionately if the spent is less than three times the actual value.

Further, as this exemption is in lieu of the exemption provided for LTC fare, an employee who has exercised an option to pay income tax under concessional tax regime under section 115BAC of the Income-tax Act, 1961 shall not be entitled for this exemption.

Through the LTC consumption boost plan for non-government employees, the government expects a demand generation of Rs 28,000 crore in the economy.

The total demand generation, including the measures announced earlier in the month, is estimated at over Rs 1 lakh crore.