Medical Allowance: Eligibility, Procedure and Exemption

Introduction

The number of diseases has risen dramatically in recent years. This is a global phenomenon, and public health experts believe that poor dietary choices and sedentary habits are the primary causes of what are referred to as "lifestyle diseases." The increase in the prevalence of these conditions has been tail- ended by a rise in medical expenses.   

This is where the concept of a medical allowance comes into play. Simply put, businesses give employees a set sum of money as a welfare allowance. This allowance is paid regardless of actual incidents of a medical emergency, i.e. recipients do not need to show that they had been ill for a fixed period.

Did you know?

An employee's medical allowance is regarded as a taxable source of income. In India, employers are taxed on their medical allowances and reimbursements of medical costs incurred by their employees.

What Is Medical Allowance?

The fixed allowance paid by the employer to the company’s employees monthly is known as a medical allowance. It is a benefit offered to help employees' medical expenses incurred during a specific fiscal year and to encourage staff health.  

Many companies offer medical reimbursement, which is the benefit or payment provided to the employee by the employer. However, according to the terms of their employment contracts, employees must submit any medical expenditures covered by their right to a medical allowance.

• If employees provide medical receipts and bills may claim the medical allowance section 10 of the Income Tax Act as a tax benefit. However, the bills must be submitted monthly to the employer for medical reimbursements.   
   
• The medical allowance component is not considered a tax exemption under the 1961 IT Act. Instead, the medical allowance is viewed as a consistent, monthly payment component. It is, hence, completely taxable in the hands of the employee. However, employees can claim these expenses as a tax deduction up to ₹15000. 
   
• It must be incurred for medical bill payments and requires accompanying papers and documents. As a result, the employers pay a set percentage of the incurred medical/health expenses.
   
• The employee can also claim under the Income Tax Act for tax exemption of medical charges up to ₹15,000 concerning the employer’s medical reimbursements.

Eligibility Exemption for Medical Allowance

According to the Income Tax Act 1961, the computation process or expenditures allowance isn't in the hands of an employee. 

Therefore, the user must satisfy the following criteria to qualify for a medical allowance exemption limit for FY 2023.

• It is necessary that the employee that spent the total quantum that they are claiming the amount spent should be on a monthly basis on medical treatments for themselves, their parents, children, spouse, and dependents.
   
• The cost incurred by the employee should be covered by medical benefits for which the employer must compensate the employee.
   
• The amount the employer is required to refund should not exceed the medical allowance exemption 2023-24 limit, which is ₹15,000 for that particular financial year.
   
• The family members included in the list are children, spouses, dependents (this includes the sister or brother of an individual), and parents.

Medical Reimbursement and Medical Allowance: What Is the Difference?  

Medical Reimbursement Exemption
The following are the exemptions in medical reimbursement:

1. Clause (b) of Section 17(2) of the IT Act, 1961, allows employees to submit bills to their employers for medical expenses.
    
2. If an employee submits all the bills per the aforementioned clause, no tax is applied to medical payments up to ₹15,000 received.
    
3. The ₹15,000 exemption is the total amount allowed in a fiscal year for medical charges incurred by the employee or their family members during medical treatment.
    
4. For reimbursement purposes, an employee's family includes their spouse, parents, and siblings who depend wholly or primarily on them. It also includes dependent children, regardless of their marital status or dependency status.
    
5. The IT Act of 1961's Section 17(2), clause (VI), specifies that any medical expenses incurred outside of India by an employee or family member are completely tax-exempt.

Medical payment isn't taxable if the treatment of an employee or his family member is accepted in any of the following hospitals:

• Hospital maintained by the employer
   
• Hospitals maintained by Central Government/ State Government/ Local Authorities
   
• Hospitals approved by the Government
   
• The Income Tax should approve the hospital.

Tax Calculation

Under the head salary, the employee's income is subject to the standard deduction of medical allowance calculation. The following table shows how the residential individual's taxable salary income is determined:

Procedure to Claim Medical Reimbursement

The procedure to claim the medical reimbursement is as follows:

1. Salaried taxpayers can claim medical deductions without presenting medical bills.
    
2. Employers may occasionally require employees to submit a medical bills reimbursement form provided by the company.
    
3. The format for reimbursing medical bills can vary from one company to another.
    
4. Employees must submit all medical receipts and bills to their employer or company to claim medical reimbursement.
    
5. The union budget for the fiscal year 2023-24 introduced new recommendations and minor revisions regarding standard deductions for the benefit of employees.
    
6. As per the latest budget, a standard deduction of ₹40,000 will be deducted from the employee's annual income. 

Standard Deduction

The standard deduction is an amount that can be subtracted by salaried taxpayers from their gross income and is fixed at ₹40.000 per year for both transportation allowance (conveyance allowance) and medical reimbursements.

This deduction is the relief of the medical payment of ₹15000 per annum and vehicle allowance of ₹1600 per month, which is generally subtracted from the gross periodic payment of an employee.

Before the deduction, an employee would receive a monthly transportation allowance of ₹1600 and an annual medical reimbursement of ₹15,000, for a combined total of ₹34,200.

However, the proposed standard deduction provides an employee benefit of ₹40000, as there is a difference of ₹5800 a year.

Conclusion

To sum up, a medical allowance is a set monthly sum employers pay employees to help with medical costs. Employees may deduct up to ₹15,000 in taxes under Section 10 of the Income Tax Act, notwithstanding the fact that the benefit is completely taxable. 

Contrarily, medical reimbursement is tax-free for employees for qualified medical costs, provided the bills are submitted on time. Employees must spend monthly money on medical care for themselves and their family members to qualify for the medical allowance exemption, and the employer's medical insurance must reimburse the costs. 

With a tax exemption of up to ₹15,000, the medical reimbursement exemption enables employees to submit medical expense bills to their employers. According to the union budget for the fiscal year 2023-24, fresh proposals and minor adjustments have been made regarding basic deductions for the benefit of employees. 

A standard deduction of ₹40.000 will be deducted from the employee's yearly income. 

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