Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis irrespective of whether they submit the bills to substantiate the expenditure or not. However, medical reimbursement is a payment made to employees against specific medical bills submitted by them, subject to entitlement. If employees want to claim tax benefit, they should submit bills for the corresponding amount every month under medical reimbursement. Under the IT Act 1961, medical allowance is not categorised as an allowance which bears exemption. Medical allowance is, therefore, a fixed pay provided by an employer every month, which is fully taxable. Employees can claim a tax benefit of up to Rs. 15,000 under medical reimbursement (payments for bills or supporting documents).
Medical Allowance and Medical Reimbursement:
Many often use the words ‘medical reimbursement’ and ‘medical allowance’ interchangeably assuming that they mean the same. However, the terms encompass different tax treatments as per Income Tax Act, 1961. According to experts, the correct nomenclature vis-a-vis the medical component of an employee’s salary should be ‘medical reimbursement’ and not medical allowance since allowance is taxable in several cases, except specifically exempted.
Medical reimbursement comes under Section 80D, wherein the maximum limit prescribed is Rs. 15,000 p.a. If bills regarding medical reimbursement are not submitted on time by an employee, 30% of Rs. 15,000 will then become the taxable amount. However, while filing tax returns, employees can reclaim 30% of the amount. Medical reimbursement is open to scrutiny by auditors and IT department sleuths. It is the employers’ responsibility to pay medical reimbursement after employees produce authentic bills to claim tax exemption. If an employer is not deducting taxes on the amount (for which no bills are submitted), it could result in TDS related penalties.
Medical Allowance Exemption:
While medical allowance is fully taxable, no tax on medical reimbursement is levied up to Rs. 15,000. The exemption vis-a-vis medical expenses should be granted even if the payment preceded the incurrence of expenditure. If an employee is provided an allowance instead of reimbursement for medical treatment abroad, it will be considered as part of the taxable component of the salary of the employee.
Medical Reimbursement Rules:
No tax is levied on medical reimbursement up to Rs. 15,000 if all bills are furnished by an employee to his or her employer as per clause (b) of Section 17 (2) of the IT Act, 1961. The amount of Rs.15,000 is, therefore, the cumulative exemption provided in a financial year for expenses incurred by an employee during medical treatment of self or any of his family members. Family for the purpose of reimbursement include spouse and children (dependent or independent, single or married) or parents and siblings (wholly or mainly dependent) of an employee. As per clause (VI) of Section 17 (2) of the IT Act, 1961, medical expenditure incurred by an employee or any of his family member outside India is fully tax exempt. There are no restrictions in terms of allopathic, homeopathic or other forms of treatment to claim exemption.
Medical reimbursement is not taxable if the treatment of an employee or his family member is undertaken in any of the following hospitals:
- Hospital maintained by Employer
- Hospital maintained by Central Government/ State Government/ Local Authorities
- Hospital approved by government
- Hospital approved by the Chief Commissioner of Income Tax.
Fixed Medical Allowance:
Fixed medical allowance is fully taxable even if it involves some expenditure for medical treatment of an employee. Central government pensioners residing in areas not under CGHS have been granted a fixed medical allowance of Rs.500. Fixed medical allowance is chargeable to tax. The reimbursement of expenditure incurred by an employee or any his family members, up to Rs. 15,000 is not treated as a perquisite and consequently, not taxable. On the other hand, Fixed Medical Allowance (FMA) is not covered under the aforementioned exemption and will, therefore, be taxable. According to experts, employees should avoid receipt of fixed medical allowance and should instead take medical reimbursement.
Medical Allowance Calculation:
The maximum tax benefit which can be claimed by an employee for medical expenditure is Rs. 15,000.
For instance,
- Kannan, a 30-year-old software engineer is eligible for medical reimbursement of Rs. 30,000.
- Kannan, therefore, has to produce medical bills worth Rs. 30,000 to claim reimbursement.
- The tax benefit, would therefore, be Rs. 15,000, even if he produces bills worth for Rs. 30,000.
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