What is Medical Allowance? Types, Rules & Taxability

Medical Allowance – Definition

Medical Allowance is a fixed allowance that an employer pays to its employees as a part of their salary to meet their regular medical needs.

In other words, a fix monthly allowance given as a part of your salary to fulfill your medical expenses is called Medical Allowance.

The employer credits a fixed amount as medical allowance along with the salary to employee’s account every month.

Usually, employers add the amount of medical allowance while preparing the Salary Sheet.

Types of Medical Allowance

Medical Allowance can be categories according to its nature and depending on company policy. Companies provide a medical allowance in 3 ways:

1. Fixed Medical Allowance
2. Medical Reimbursement
3. Mediclaim Policy – Health Insurance

1. Fixed Medical Allowance

As the name states, Fixed Medical Allowance is a fixed amount paid by the employer and is part of your taxable income irrespective of the money spent on medical treatment or not. It is a part of your salary.

Example

For example, if the salary consists of Rs. 5,000 as medical allowance of Mr. Arjun. This amount will be in his compensation and he will pay the tax on it if he falls under the taxable limit for that particular year.

2. Medical Reimbursement

Medical Reimbursement is on actual basis. The employee has to present bills of medical treatment taken or medicine obtained. The employer reimburses the claimed amount after checking on actual basis.

Example

Mr. Arjun is admitted to hospital for severe fracture in his hand and the bill amounts to Rs. 38,000. He applies for reimbursement to his employer. The employer reimburses Rs. 38,000 in full as per the company policy.

At the time of filing:

Rs. 15,000 will be deducted as medical reimbursement out of Rs. 38,000 from his taxable income. Hence Mr. Arjun will pay tax on rest Rs. 23,000.

As an employee, you find this term in your Salary Slip.

3. Mediclaim Policy – Health Insurance

The employer usually provides Mediclaim for the employee only and hence the employer can claim that in his corporate return.

Rules For Reimbursement of Medical Expenses

Public sector employees compulsorily get this allowance as per the govt. policies. In the private sector, it solely depends on the employer. The amount also varies from employer to employer.

• Medical expenses for self, spouse, children or dependent parents & siblings are eligible for exemption.
• These reimbursements include medicines taken from medicine shops or pharmacies, treatment of any ailment clinics, private hospitals or public hospitals.

• Employee submits the medical bills their employer. You need not present them to the IT department at the time of filing ITR.
• Maximum limit of reimbursement is Rs. 15000 for self, spouse, and children.

Taxability of Medical Allowance, Medical Reimbursement, and Mediclaim Premiums

• Fixed Medical Allowance is fully taxable.
• Medical reimbursement is non-taxable up to Rs. 15,000 per year according to the Clause (v) of the Provision to Section 17 (2) of the Income Tax 1961.
• An employer can claim a tax deduction on health insurance premiums paid for the employees.
• The employee cannot claim the deduction if an employer provides health Insurance coverage.
• Under section 80 D, an individual who purchases health insurance by himself, his premium is exempt up to Rs. 15,000 for self, spouse, and children.
• An additional deduction for dependent parents of Rs. 15,000 and Rs. 20,000 in case of senior citizens.

New Amendments in Taxability of Medical Reimbursement Amount

As per the amendment in Budget 2018, a standard deduction of Rs. 40,000 instead of tax exemption for medical reimbursement of Rs.15,000 and transport allowance of Rs.19,200. Thus, it is applicable from April 2018.

For FY 2019-20 this standard deduction will be to Rs. 50,000 as per the amendment in Budget 2019.

Medical reimbursement is not taxable in the following scenario:

In case of the treatment of the employee/his family member is obtained in hospitals maintained:

• By the Employer.
• By Central Government/ State Government/ Local Authorities.
• Approved by the Government.
• Approved by the Chief Commissioner of Income Tax.

You can download ready-to-use HR templates in Excel like Salary Sheet and Corporate Salary Slip from our website.

In addition to the above, you can also download HR Metric templates like Total Compensation Spend Rate Calculator, Benefits Spend Rate Calculator, and Annual Benefit Spend Change Report.

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