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

The Supreme Court ruled on 4 November 2022 that leave-travel payments for journeys with a foreign leg do not qualify for India’s travel tax exemption. The decision came in State Bank of India v. Assistant Commissioner of Income Tax, Civil Appeal No. 8181 of 2022.

The case concerned reimbursements for employees’ leave travel. The court rejected the bank’s position on the tax treatment of journeys involving travel abroad.

The ruling also addressed the employer’s role. SBI had to deduct tax at source on the payments.

Later tribunal orders revisited a separate question: whether the bank could be treated as in default for periods covered by court directions. The distinction recurred in 2026.

The statutory boundary is travel to a place in India

The exemption in Section 10(5) turns on the destination described in the law: travel “to any place in India.” The Supreme Court held that a journey with a foreign leg falls outside that wording.

That reading limits the relief to domestic travel. An overseas segment takes the journey beyond the provision’s stated reach, so the payment cannot receive the exemption merely because the employee is travelling on leave.

The statute covers travel concession or assistance for an employee proceeding on leave to a place in India, and travel after retirement to a place in India. Rule 2B also links the relief to prescribed fares and the shortest route within India.

The court therefore rejected an interpretation that would extend the exemption to a journey containing travel abroad. The location requirement controls.

SBI was required to withhold tax on the payments

The dispute grew out of SBI’s LTC/LFC reimbursements to employees whose journeys included foreign travel. The Supreme Court held that the bank had to deduct tax at source under Section 192(1) on those payments.

That withholding obligation follows the court’s conclusion about the exemption. Where the payment does not qualify for the relief, an employer cannot treat it as exempt for withholding purposes on the basis of the same claim.

The ruling resolved the substantive tax issue against SBI. It did not, however, eliminate every later dispute over the consequences of withholding tax late or not withholding it during a period governed by an interim court direction.

Tribunals treated taxability and default exposure separately

Several tribunal proceedings in 2026 considered the Supreme Court ruling in disputes involving SBI. Their decisions treated the underlying taxability question as settled, while separately examining whether the bank faced default consequences for particular periods.

An ITAT Agra order dated March 26, 2026, said the Supreme Court had already concluded that foreign-leg LTC did not qualify for the exemption. The substantive point was no longer open in that proceeding.

The ITAT Rajkot order, pronounced on August 25, 2026, also relied on the Supreme Court’s decision. It distinguished the tax treatment of the payments from SBI’s exposure for periods protected by court directions against TDS action.

An ITAT Ahmedabad order dated August 28, 2026, likewise treated the merits as settled against the assessee while considering SBI’s reliance on interim Madras High Court orders. Those directions figured in disputes over whether the bank could be treated as having defaulted during the periods they covered.

Assessment Year 2016-17 appeared in multiple orders. The proceedings also referred to demands under Sections 201(1) and 201(1A) for alleged failure to deduct tax at source.

Those proceedings did not restore the exemption. Instead, they addressed whether interim protections changed the treatment of SBI’s conduct for specific periods. The tribunal materials distinguish the underlying tax liability from the question of default exposure.

Court-protected periods remain a separate issue. A temporary direction affecting TDS collection or default treatment does not revive the exemption.