Written by : AK Agrawal

An experiences Chartered Accountant and Techno-Functional consultant working in industry for over 10 years dealing with multinational corporate clients. He is loves reading latest trend of technology trend.

What is Medical Allowance? Is It Taxable?

AK Agrawal
AK Agrawal, Chartered Accountant

Sep 20, 2021 04:11

Lifestyle diseases have replaced traditional health risk factors. Today, with urbanisation and unhealthy eating habits, the morbidness ratio has increased at an unprecedented rate. Diseases like cardiovascular, diabetes, respiratory, hypertension, and blood pressure are not new to people anymore.

In this scenario, medical allowance can be a big saving. An allowance is a benefit availed by an employee to pay their bills. It is generally provided by the employer to cover various expenses like medical, leave travel, conveyance and so on. It is one of the most compelling benefits to uncover. In this article, we explore more about medical allowances and check whether it is taxable or not. Let's take a look.

What are medical allowances and reimbursement?

A medical allowance is a fixed benefit granted by the employer to an employee. It comes along with their total salary and can be claimed every month even if you do not submit medical bills or not. This means that regardless of any sustainable medical expenditure, it applies to every employee. Since its fixed, it is taxable. Even though it is an obligatory policy for public sectors, it does not always befit the private sector.

On the other hand, medical reimbursement allows employers to reimburse the portion of the health expenses incurred by the employee. It refuges not only the employee but also the spouse, children, siblings or parents. However, the siblings and parents can claim these allowances only if they are completely dependent on the employee and do not possess any other medical aids. The good news is that, unlike allowance, it can be exempt from tax to a certain extent. Currently, the Income Tax gives a tax reduction of up to INR 15,000 on medical reimbursements paid by the employer. Hence, any expected or unexpected medical bills can be easily covered under these schemes.

Where does the difference between medical allowance and reimbursement lie?

Many confuse between the two- medical allowance and reimbursement. The difference lies in its nature, that is, whether it is fixed or not. As stated earlier, medical allowances are fixed benefits. But reimbursement can be claimed when the employee submits a supporting bill indicating their expenses and the employer allocate resources after reviewing the submitted expense list. These policies are executed to support employees from stress and other demanding necessities.

What is a medical allowance exemption?

Medical allowance exemption is applicable provided the employee submits all the expenses to the employer. In such cases, no income tax on medical reimbursement is levied up to Rs. 15000. This is the maximum exempted amount an employee can avail in a financial year. Thus, the claim for obtaining medical treatment for self or family is made at the end of a financial year.

What are the different medical reimbursement exemption rules?

Medical reimbursement comes under Section 80D of the IT Act of 1961. The related health documents are submitted directly and only to the employer. If there is any hamper or delay for submission on the employees' part, then 30% of the Rs. 15,000 deductions can be liable for taxation. But it can be reclaimed when filing tax returns.

According to (VI) of Section 17 (2) of the IT Act, 1961, the medical expenditure incurred by family members outside India is completely exempted from tax. This benefit is pertinent irrespective of allopathy or homeopathy or any other forms of treatment given the following conditions:

  • Hospital supported by the employer
  • Hospital supported by Central Government/ State Government/ Local Authorities
  • Hospital permitted by the government
  • Hospital permitted by the Chief Commissioner of Income tax

Is medical allowance taxable?

Yes, Fixed Medical Allowances (FMA) are fully taxable. Even if the expenses include employee medical treatment expenditure, it is still chargeable. If you are a central government pensioner who resides in areas not under CGHS, Rs 500 will be allocated as a medical allowance. Whereas medical reimbursements allow Rs 15,000 tax exemption. Hence it is advisable for employees to claim medical reimbursements rather than fixed medical allowances.

How to calculate medical treatment reimbursements?

Let us look at an example to understand medical treatment reimbursements calculation.

Take the case of Prabha. Prabha works in an IT firm that offers reimbursements of Rs. 35,000. One day she met with an accident and broke her angle. The total medical bill she received was Rs. 35,000. Now, she can only claim Rs. 15,000, as it is the maximum allowed limit. So, she can submit her bills to the employer and make a claim even if her total reimbursement is Rs. 35,000.

Budget 2018 and its impact on medical allowances

The amendment in Budget 2018 authorised by Arun Jaitley made significant alterations in medical allowance taxes. The new modification includes a reduction of Rs 40,000 rather than a tax exemption of Rs. 15,000 as medical reimbursement and transport allowance of Rs. 19,200. It is implemented and is applicable from April 2018. The amendment in Budget 2019 extended this standard deduction to Rs. 50,000.

How to claim tax exemption?

Claiming tax exemption for medical allowance is easy if you have the necessary knowledge about the field. At first, you need to submit a medical certificate provided by the medical partitioner under Section 80DDA. This Act protects numerous medical conditions like neurological diseases such as Parkinson’s and Ataxia, chronic ailments like malignancies, haematological conditions like haemophilia, AIDS and Thalassemia. Apart from this, there are special provisions for pensioners. As we said earlier, the amendment made it easy for pensioners to claim 40,000 each year as a standard deduction. However, if the pensioner has multiple sources of pension, then the exemption can be made only for a single pension.

Leveraging Tax exemptions such as medical allowance gets simplified with Gotaxfile!

If you do not claim your medical expenses, then these overheads will be computed as your personal expenditure. Considering the medical bills of current Indian hospitals, it can cost you more and simultaneously hamper deductions. If you feel lost in the amassing medical bills, it is time to seek help. As your salary is already drained with huge medical bills, additional taxes can drown your income.

So, you might need expert guidance to get appropriate tax exemptions. Gotaxfile understands your situation and supports you with the necessary help. Reach out to us to unlock your hidden benefits.

AK Agrawal
AK Agrawal, Chartered Accountant

Sep 20, 2021 04:11

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