What is Medical Allowance?
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.
- 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.
Highlights of Union Budget 2018 for Medical Allowance
In the Union Budget 2018, Finance Minister Arun Jaitley declared that he is proposing a standard deduction of Rs.40,000 from the income offered to employees. This will be in lieu of medical reimbursement and transport allowance for taxpayers who are salaried. This move has made the government sacrifice a revenue of Rs.8,000 crore. The Finance Minister proposed that he will remove the current medical reimbursement expenses of Rs.15,000 and the annual transport allowance of Rs.19,200.
With this new development for medical allowance, the tax savings will be Rs.290 for individuals who have been paying 5% tax on this particular income. If one is paying 20% of tax on this income, then he or she will save taxes of Rs.1,160. On the other hand, one who pays 30% tax on this income will save an amount of Rs.1,740. Medical reimbursements for expenses related to hospitalisation will continue.
This new introduction of standard deduction will help pensioners extensively as they have till now not received any standard deduction or any other allowance that was provided to salaried employees. Now, pensioners will get the chance to save taxes that are payable on this full deduction amount. However, they will have to pay a higher cess on the remaining income. Apart from this, the Finance Minister announced that he has proposed to increase the deduction for health insurance premiums under Section 80D of the Income Tax Act from Rs.30,000 to Rs.50,000. For senior citizens suffering from critical illnesses, the deduction will now be Rs.1 lakh.
It is estimated that around 2.5 crore salaried employees and pensioners will enjoy the advantages of the new standard deduction launched in the Budget 2018.
Medical Allowance FAQs
- What is the maximum limit for medical reimbursement
- How do I calculate my medical allowance deduction
- How much medical allowance do pensioners receive
- If I get two or more pensions, how much medical allowance do I get
- Under what conditions is medical reimbursement exempt from tax
Medical reimbursement can be claimed up to a maximum of Rs.15,000 per year.
The maximum amount that can be claimed as deduction for medical allowance is Rs.15,000 per year. Therefore, in case you have incurred medical costs of, say, Rs.38,000 over the course of a financial year, you will have to produce your medical bills and you will get a tax benefit of Rs.15,000. Regardless of how much you spend on medical treatments, your tax deduction is limited to Rs.15,000. However, Arun Jaitley, the Finance Minister of India, made a proposal in Budget 2018 according to which a standard deduction of Rs.40,000 will be allowed for medical reimbursement as well as transport allowance, with both being clubbed together.
Pensioners who live in areas that are not covered under CGHS are granted Rs.500 as medical allowance provide they do not use CGHS facilities for OPD treatment from CGHS dispensaries from another city. For those who reside in cosmopolitan cities that and are not covered by CGHS dispensary can also avail this allowance if they submit a certificate showing the same.
Pensioners who earn two or more pensions will be eligible for only one medical allowance in case the pensioner does not use the medical facilities offered by their organisation. For instance, if a pensioner receives civil pension as well as military pension but uses the medical facilities of either one of the military or civil organisation, he/she will not be eligible for medical allowance. But if he/she does not use either the civil or military medical facilities, he/she can avail medical allowance for either civil or military facilities.
Medical reimbursement will be exempt from tax in case the hospital is maintained by the employer or local authorities or the state government or the central government, or if it is approved by the government or the Chief Commissioner of Income Tax.
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