Both the employer and the employee try to structure salary to maximize in-hand income of the employee. There are certain allowances or expense reimbursements that are not taxable in the hands of the employee. One such payment from employer is reimbursement of the medical expenses of the employee or his family.
There are two terms used interchangeably by many of us when it comes to medical costs borne by the employer. Medical Allowance and Medical Reimbursement.
Though the intent of both medical allowance and medical reimbursement is to provide relief to employee for expenses incurred towards medical treatment, the tax treatment of the two payouts differs significantly.
In this post, I shall highlight the difference between the two.
Fixed Medical Allowance
Fixed Medical allowance is part of your salary structure. Hence, you get medical allowance in your pocket regardless of whether you (or any family member) undergo medical treatment or not.
You are not even required to submit medical bills to the employer.
Fixed Medical allowance is fully taxable. The allowance gets added to your income and gets taxed at your marginal income tax rate (income rate slab).
Medical Reimbursement
Reimbursement of medical expenses by the employer is exempt from income tax to the extent of Rs 15,000 per financial year.
The reimbursement is only on actual basis (employer can’t reimburse more than you have incurred). Contrast this with fixed medical allowance, which is guaranteed.
The medical treatment can be for the employee and his family members.
Do note even if the employer reimburses your medical bill of Rs 25,000, only a maximum of Rs 15,000 is be exempt from tax. Remaining Rs 10,000 will be added to your income and will be taxed accordingly.
The tax treatment of medical reimbursements is defined under Section 17 of the Income Tax Act.
Let’s consider the following scenarios.
- You submit bills to the extent of Rs 15,000. The entire reimbursement by the employer is tax-free.
- You submit medical bills of Rs 9,000. The employer reimburses Rs 9,000 and the amount shall be exempt from tax.
- You submit bills of Rs 20,000 and the employer reimburses the entire amount. Only Rs 15,000 is exempt from tax and the remaining Rs 5,000 is added to your taxable income.
Points to Note
- Family includes self, spouse and children and dependant siblings and parents.
- You can seek reimbursement for bills for purchase of medicines, doctor consultation fee, checkups, diagnostic tests or any procedure.
- The reimbursement is not limited to allopathic treatment. You can claim reimbursement for homeopathy, ayurvedic treatment too.
- 15,000 is for the entire financial year (and not Rs 1,250 per month).
- Medical reimbursement is not your right. Section 17 merely states that if your employer reimburses the cost, then the reimbursement up to Rs 15,000 will not be added to your income. If the employer does not reimburse, then there is no question of tax benefit.
In addition to above, there are specific scenarios where the entire amount reimbursed/cost incurred by the employer is exempt from tax i.e. there is no cap on tax exemption.
- The value of the treatment provided to the employee or his family member at a hospital maintained by the employer.
- Amount paid by the employer in respect of the medical treatment availed by employee or his family member in a Government hospital or any hospital approved by Government for such employees.
- Cost incurred for treatment of specific illness in any hospital approved by the Chief Commissioner. (You must file a certificate from the hospital specifying the disease/treatment and payment receipts).
Treatment outside India
Any expenditure incurred by employer towards medical treatment and travel and stay (in relation to treatment) of employee/family member and one attendant is not taxed in the hands of the employee.
However, there are a few conditions to be met before you avail such tax benefit. The gross total income of the employee before inclusion of such expenditure (by employer) shall not exceed Rs 2 lacs. If gross total income exceeds Rs 2 lacs, then this expenditure shall be considered income of the employee and taxed as per income tax slab.
Disclosure: This is a simplistic representation of income tax laws. You are advised to consult a good Chartered Accountant or a tax expert before you act on any information shared in this post.