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.
17 thoughts on “Medical Allowance Vs. Medical Reimbursement”
Hi Deepesh,
I used to work for the famous IT bellwether a few years back and the salary structure they had was the most tax unfriendly salary structure which I come to realize only in the past year or so.
They had Medical Allowance, no food coupons, lower basic (hence low PF contribution from both employee and employer).
Only after switching job, do I enjoy the benefits of medical reimbursements, telephone reimbursements, food coupons for Rs.3000/month and fuel reimbursements. My take home has significantly improved by the above options.
Looking back at my previous job, I feel cheated by them and they should have purposefully kept the salary structure to make employees pay more taxes to the government. I have lost respect on the company whose founders are enjoying many crores of tax free dividends every year.
Hi Pradeep,
Yes, they could have done better.
If my employer is paying me 1250 as medical allowance as a part of salary so we don’t have to submit bills and its taxable so does it mean entire 15000 amount will be taxable.
I mean both allowance and reimbursement has tax exemption limit of 15000 (correct me if i am wrong)or is it just reimbursement limit and not the allowance limit.
If we submit bills of 25000 as reimbursement then employer will reimburse me the entire amount and i will get 15000 tax exemption and rest amount will be taxable income but if i get 1250 in my salary then i wont be getting any tax benefit or will i be getting and if i am getting why allowance is said to be taxable and not reimbursement i also said to be taxable
I am very much confused relating to taxation of both.
Dear Vikas,
Don’t get confused. You can talk to accounts team in your company. They will explain the structure to you.
From what I have seen, companies use names interchangeably. And that adds to the confusion.
Medical allowance is taxable.
Medical reimbursement up to Rs 15,000 is non-taxable.
If company is paying Medical allowance, then can we still submit medical bills of 15,000 and make Medical allowance non-taxable ?
In case of Medical allowance, if we submit bill worth more than 15,000 then how would it be handled.
Thanks.
I think according to the “exact” law,
i) if medical reimbursement (actually giving back the medical expenses incurred by the employee) is given by a company , then upto 15K is non taxable
(The company may reimburse 40K,60K or 1lakh or any upper limit according to their policy)
AND
ii) Medical allowance of Rs.1250/pm(Rs.15K/y) or any amount per month towards medical allowance is taxable.
Here is the interesting part:
Although companies pay medical allowance,they may be free to interpret it as medical reimbursement , and give the tax benefit if original bills are provided.
(Another way of looking at it is, company is paying medical reimbursement to us in advance in the form of allowance – it is their money and they can give reimbursement without asking for bills. But when you want them to be tax exempted, your company is not the only involved entity here, and hence original bills have to be submitted.)
hello sir ,
i was working in Bombay in a company which was giving me 1250 medical allowance. at the month of January they require original medical bills of 15000/- or more than it. and provide the tax benefit of 15000/-.
now i changed the company and shifted to Indore. here the new company provides medical reimbursement. and the accounts department of new company says that they will deduct tax on medical allowance given by previous company.
what should i do sir?
i have submitted all original medical bills and house rent receipts to my previous company at Mumbai.
my salary on hold plz help.
7045272404
protonharsh13@gmail.com
Hi Harsh,
Technically, medical allowance is taxable. The problem is that the companies use the terms interchangeably.
That creates the whole confusion.
When I used to work for a bank, they used to show it as medical allowance only but the allowance was in fact treated as reimbursement. So, nomenclature can vary. Fortunately, I didn’t switch jobs.
How does your new employer know about your previous salary structure? You submitted Form 16 from the previous employer to the new company?
Typically, new employer is worried about only their portion of the salary (not the previous ones). Don’t know what your new employer is doing.
Suggest you talk to a good Chartered Accountant. He will be able to guide you better.
Hi Deepesh,
I have a medical bill of 14000/- rs, which I have claimed through my medi-claim policy. I have received 12000/- through the claim. Can I submit this bill of Rs 14000/- for medical reimbursement tax benefit? Or is it a violation of the law?
Thanks J Jose
Hi Jose,
You will have to figure out the non-paid parts of the bills and you can claim if you have proper documents.
in my opinion, there is no violation so long as you are not more than 100% on any of the items in the bill.
Hi Dipesh,
I don’t have medical allowance/ reimbursement component in my salary, can I avail tax benefits if i submit the bill? in fact I’ve already submitted the bills but they are not reflected under form-16. I know, in case of LTA it’s not possible in such case.
regards,
Ashish
Hii dipesh
I am central government employee.i have medical reimbursment of one lack rupee.it is sectioned by department.the medical treatment I have taken in a CGHS impanelled hospital.is this reimbursment of rupees one lack is taxable.
Now, there is standard deduction of Rs 40,000.
You can ignore this post.
Please go through this sir
Tax-Free Prerequisites under Section 17(2):
Apart from medical reimbursement worth Rs.15,000 being tax-free, the following prerequisites are considered tax-free under Section 17 (2):
Bills incurred for medical treatment of employee or family members of the employee in a hospitals maintained by the employer.
Bills incurred for medical treatment of employee as well as his or her family members in government hospitals or hospitals maintained by local authorities or government approved hospitals.
Perhaps, I jumped the gun. Thanks for pointing out.
Yes, this is permissible under specific cases.
Since the treatment is in an hospital empanelled with CGHS, the reimbursement should be tax-free.
Thanks sir I don’t want to prove you wrong Just want to know this is correct or not.
I am working in a limited Co. I join the co. in 2014, i have medical allowance as a part of salary but it is not paid with salary. Now I got my full & Final on 30.10.2020 and want to claim my medial allowance. is it claimable or not?