Supreme Court Clarifies Section 10(5) Tax Exemption for Foreign Travel

India’s Supreme Court has made a significant ruling regarding the Leave Travel Concession (LTC) tax exemption, specifically addressing its applicability to journeys that include foreign travel. In a decision handed down on November 4, 2022, in the case of State Bank of India v. Assistant Commissioner of Income Tax, the court clarified that the tax exemption under Section 10(5) of the Income Tax Act does not extend to travel payments for journeys with a foreign leg. This ruling has important implications for both employees and employers concerning the tax treatment of travel reimbursements.

The core of the dispute revolved around whether reimbursements for employees’ leave travel, when part of the journey took place outside India, could be considered tax-exempt. The Supreme Court’s interpretation firmly established that the statutory language of Section 10(5) limits the exemption to travel “to any place in India.” This means that any travel segment occurring outside of India disqualifies the entire journey from the Section 10(5) exemption.

Understanding the Statutory Boundary: Travel Within India

The exemption provided by Section 10(5) of the Income Tax Act is specifically designed to offer tax relief for employees undertaking domestic travel during their leave. The law clearly states that the travel concession or assistance is for an employee proceeding on leave “to any place in India.” This wording is critical and forms the basis of the Supreme Court’s decision.

The court rejected any interpretation that would broaden the scope of the exemption to include international travel. An overseas segment of a journey, according to the ruling, places it outside the explicit provisions of the law. Therefore, even if an employee is traveling on leave, if any part of their journey involves going abroad, the associated travel payments will not qualify for the tax exemption. This interpretation is further supported by Rule 2B of the Income Tax Rules, which links the relief to prescribed fares and the shortest route within India.

Employer’s Obligation: Withholding Tax on Foreign-Leg Travel

Beyond clarifying the exemption’s scope, the Supreme Court’s decision also addressed the responsibilities of employers, such as the State Bank of India (SBI). The court ruled that SBI was required to deduct tax at source on the LTC/LFC reimbursements made to employees whose journeys included foreign travel. This obligation arises directly from the court’s finding that such payments are not eligible for the Section 10(5) exemption.

When a payment does not qualify for tax relief, employers cannot treat it as exempt for the purpose of tax withholding. This means that employers must accurately assess the nature of travel reimbursements and ensure that appropriate taxes are deducted at source as per Section 192(1) of the Income Tax Act. The ruling resolved the substantive tax issue, confirming that the exemption does not apply to foreign-leg travel, and consequently, the employer has a duty to withhold taxes on such reimbursements.

Tribunal Proceedings: Taxability vs. Default Exposure

Following the Supreme Court’s judgment, several tribunal proceedings in 2026 revisited aspects of the ruling, particularly concerning SBI’s conduct. These tribunals distinguished between the underlying taxability of the foreign-leg travel payments and the employer’s potential default exposure for specific periods. The substantive tax issue, that foreign-leg LTC does not qualify for the exemption, was considered settled by the Supreme Court’s decision.

For instance, an Income Tax Appellate Tribunal (ITAT) Agra order dated March 26, 2026, acknowledged that the Supreme Court had definitively concluded that foreign-leg LTC was not exempt. Similarly, an ITAT Rajkot order from August 25, 2026, relied on the Supreme Court’s decision to address the tax treatment of payments. However, these tribunals also examined whether SBI could be considered in default for periods covered by interim court directions. These directions, often from high courts, might have temporarily affected the treatment of tax deduction at source (TDS) actions.

The proceedings highlighted that court-protected periods, where interim orders might have shielded the employer from immediate default consequences, are a separate matter from the fundamental taxability of the travel payments. A temporary direction affecting TDS collection or default treatment does not, in itself, revive the tax exemption for foreign-leg travel. The tribunals focused on whether these interim protections altered the employer’s conduct’s consequences for specific periods, rather than re-establishing the exemption itself. This distinction is crucial for understanding the full scope of the Supreme Court’s ruling and its subsequent interpretations by lower judicial bodies.

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