Medical Allowance - Reimbursements for Medical Expenditure

Medical allowance denotes a fixed stipend disbursed typically to employees by their employers on a monthly basis, irrespective of whether they furnish receipts to substantiate their medical expenses. There is no specific medical allowance percentage in salary. The employee may receive a fixed medical allowance of ₹1000, ₹3000 or any other amount, depending on various factors. Conversely, medical reimbursement entails compensating employees against specific medical invoices they submit, contingent upon entitlement.

To avail of tax incentives, employees must furnish monthly invoices for medical reimbursement commensurate with the expenses incurred. As per the Income Tax Act, medical allowance is not categorised as an allowance eligible for exemption, thus rendering it fully taxable.

Nonetheless, employees can seek a tax advantage of up to ₹15,000 through medical reimbursement by furnishing valid receipts or supporting documentation. The primary aim of this allowance is to alleviate employees from the financial strain of medical expenses.

This allocation is frequently integrated into your comprehensive benefits package and may be disbursed monthly, quarterly, or annually. However, the calculation of medical allowance is contingent upon the company's policies, income levels, and job roles.

Depending on the company's nature and policies, there are 3 primary types of medical allowances in salary:

• Health Insurance

• Medical Reimbursement

• Fixed Medical Allowance

Types of Medical Allowance in Salary: Health Insurance

Health insurance, a type of medical allowance, provides comprehensive financial healthcare coverage to employees and dependents, i.e. their families. This allowance serves as a safeguard against the financial burden of medical expenses incurred by individuals and their dependents.

Under this arrangement, employees receive access to a health insurance plan either as a benefit offered by their employer or through a group insurance plan. The coverage typically extends to the employee's spouse, children, and sometimes even parents or other dependents.

Types of Medical Allowance in Salary: Medical Reimbursement

Frequently, individuals interchangeably use the terms 'medical reimbursement' and 'medical allowance', presuming them to have identical meanings. Nonetheless, these terms carry distinct tax implications as per the Income Tax Act of 1961.

Medical reimbursement entails an arrangement between an employer and an employee wherein the employer covers a portion of the employee's medical expenses. Factors such as employees' prolonged work hours and job-related stress have prompted the introduction of medical reimbursement.

As a result, the prospect of elevated medical expenditures has become a component of every employee's financial responsibilities. Conversely, employers undertake the moral obligation to oversee these factors diligently.

Types of Medical Allowance in Salary: Fixed Medical Allowance

The fixed medical allowance is subject to full taxation, regardless of whether it covers some medical treatment expenses for an employee. This pertains to a fixed sum disbursed by employers to employees as a component of their salary. Regardless of whether this sum is utilised for medical expenses or not, it is subject to taxation.

Unlike medical reimbursement, where employees are required to submit bills for actual medical expenses, a fixed medical allowance is provided regardless of whether employees use it for medical purposes.

Central government pensioners residing in non-CGHS areas receive a fixed medical allowance of ₹500, which is taxable. However, reimbursement of expenses incurred by an employee or their family members, up to ₹15,000, does not necessitate taxation and is therefore not taxable.

In contrast, Fixed Medical Allowance (FMA) is not eligible for the aforementioned exemption and is consequently taxable. Experts advise employees to refrain from opting for fixed medical allowance and instead opt for medical reimbursement.

Section 10 of the Indian Income Tax Act provides various exemptions, including the medical allowance exemption under Section 10, which excludes the medical allowance received from being included in taxable income.

• To qualify for this exemption, employees must provide documentary proof of their medical expenses. Additionally, other criteria must be met to claim the medical allowance exemption:

• Medical bills and related documentation should encompass all aspects of an illness, including hospitalisation, surgical procedures, medications purchased from retailers, and other expenses for post-hospitalisation care. These claims fall under Section 17(2), Clause (b) of the IT Act, 1961

• Employees can claim reimbursements not only for themselves but also for their spouse, dependent parents, siblings, and children. It's important to note that medical allowances for siblings or dependents are only payable if they lack any other existing medical cover and are entirely dependent on the employee.

• Section 80D of the IT Act of 1961 regulates all facets of medical reimbursements. Employees are required to submit all documents solely to their employer. Failure to submit the necessary documents in a timely manner may result in 30% of the ₹15,000 exemption being subject to taxation. However, employees can recover this 30% when filing their tax returns.

An employee can avail a maximum tax benefit of Rs. 15,000 for incurred medical expenses. For instance:

Let's consider Sheila, a 27-year-old marketing professional who is entitled to medical reimbursement of ₹25,000.

• Consequently, Sheila must submit medical bills totalling ₹25,000 to seek reimbursement.

• However, the tax benefit would remain capped at ₹15,000, even if the submission exceeds the amount.

Tax is not imposed on medical reimbursement up to ₹15,000 provided that an employee submits all bills to their employer, as stipulated in clause (b) of Section 17(2) of the IT Act, 1961. This amount of ₹15,000 represents the total exemption granted in a fiscal year for expenses incurred by an employee during their medical treatment or that of any family member.

The term "family" for reimbursement purposes encompasses a spouse, children (whether dependent or independent, single or married), parents, and siblings who are entirely dependent on an employee.

According to Section 17(2), clause (VI) of the Income Tax Act, 1961, medical expenses incurred by an employee or their family members outside India are fully exempt from tax. There are no restrictions regarding the type of treatment—whether allopathic, homoeopathic, or other forms—to qualify for the exemption.

Furthermore, medical reimbursement remains non-taxable if the treatment is conducted in any of the following hospitals:

• Hospitals maintained by the Central Government/State Government/Local Authorities.

• Hospitals approved by the Chief Commissioner of Income Tax.

• Hospitals maintained by the employer.

• Hospitals approved by the government.

The distinction between medical allowance and medical reimbursement highlights the importance of proactive healthcare planning and financial management. With the contemporary tight-scheduled lifestyle, it's crucial to recognise that neither medical allowance nor medical reimbursement can fully mitigate the financial risks associated with healthcare expenses.

This underlines the significance of a reliable health insurance policy. Tata AIG health insurance policy serves as a critical safety net, offering broader coverage for various medical expenses, including hospitalisation, treatments, medications, and surgeries.

Moreover, our health insurance policies often include additional benefits such as insurance for pre-existing medical conditions, preventive care services, and emergency medical evacuation, further enhancing their value as a safeguard against healthcare-related financial risks.

Tata AIG’s medical insurance plans provide financial protection against unexpected healthcare costs, ensuring that individuals and their families can access quality medical care without undue financial strain.

While medical allowance provides a steady stream of income, it may only partially cover unforeseen medical costs, necessitating the need for additional financial safeguards. Medical reimbursement, on the other hand, offers direct compensation for incurred medical expenses, alleviating the burden on employees' finances.

In conclusion, understanding the nuances between medical allowance and medical reimbursement is essential for employees to manage their healthcare expenses and tax liabilities effectively.