written by Khatabook | July 16, 2021

Medical Allowance: Its Exemption Rate, Limit and How To Calculate

Many health and medical benefits are provided these days by employers, given the commute, workplace stress, long working hours, and genetic factors. These cover medical expenses incurred on you, parents, children, spouse and dependent sisters/ brothers. Thus, medical reimbursement, exemption of medical allowance under the IT Act, and allowances are available to ease the burden of medical expenses incurred in any FY or financial year.

What is Medical Allowance?

The fixed allowance paid by the employer to the company’s employees monthly (irrespective of bills submission) is known as medical allowance. It is a benefit provided to promote the health of the staff and support medical expenses incurred by the employees in a particular financial year.

Many companies offer medical reimbursement, which is the payment or benefits provided to the employee by the employer. However, employees should submit the medical bills which are subject to the medical allowance entitlement according to the work contract. 

Medical allowance exemption section 10 under the Income Tax Act can be claimed as a tax benefit if the employee submits medical vouchers and bills. However, they must be submitted to the employer every month for medical reimbursements. 

Under the 1961 IT Act, the medical allowance component is not treated as a tax exemption. Instead, the medical allowance is treated as a fixed component of the payment every month. It is, hence, fully taxable in the hands of the employee. However, the employees can claim these expenses as a tax deduction up to Rs 15000. 

It must be incurred for payments of medical bills and needs supporting bills and documents. Thus the employers reimburse a fixed portion of the medical/health expenses incurred. The employee can then claim under the Income Tax Act for tax exemption of medical expenses up to INR 15,000 in respect to the employer’s medical reimbursements.

How To Calculate Medical Allowance In Salary?

Let us use an example:

X works at a Pvt. Ltd firm and spends Rs 12000 on medical bills for his spouse’s medicines. He has to submit the original bills for the purchases to his employer to have the Rs 12000 reimbursed and claim a medical allowance under Section 10. If he spends Rs 25000 instead and the employer reimburses the entire Rs 25000 spent, only Rs 15000 can be claimed as tax exemption. The remaining Rs 10000 is treated as taxable income in this case.

Medical Allowance Latest Update

The standard deduction was reintroduced instead of medical allowance exemption under the Income Tax Act and the budget for FY 2018-19. The travel and medical allowances benefits were discontinued from FY 2018-19 and clubbed under the standard deduction to compute the medical allowance exemption limit for FY 2018-19. The Standard Deduction or medical allowance exemption limit for AY 2020-21 is presently (from the FY 2019-20) capped at Rs 50000 per annum. Hence the medical allowance for FY 2021-22 is subject to a consolidated standard deduction of Rs 50000 per year. 

Also Read: Conveyance Allowance- Definition, Limit, Exemption and Calculation 

Medical Allowance Exemption Eligibility

The 1961 Income Tax Act prescribes that such medical allowance calculation of expenditure is not a prerequisite/allowance in the employee’s hands. Hence for medical allowance exemption, the following conditions need to be met.

  • The employee must have already spent the amounts claimed monthly by paying for the medical treatment incurred on self, spouse, children, parents, dependents etc. 
  • Such amounts should be covered as medical entitlements to be reimbursed by the employer.
  • Reimbursed amounts from the employer do not exceed the medical allowance exemption limit of Rs 15000 in that FY.
  • Family means spouse, parents, children and dependent brothers/sisters of the person.

Limitations On The Amount Claimed

When all the above eligibility conditions are met, the employee can claim a tax exemption to the extent of Rs 15000 in that particular FY. The employer reimburses the actual expenses incurred on the production of valid medical vouchers/bills. The employer thus reimburses what is already spent by the employee. The limit of Rs 15000 as tax exemption stays fixed irrespective of money spent on medical expenses or reimbursement by the employer.

How To Claim Medical Reimbursement?

The employee’s claim reimbursement is made by the employee on producing the original bills of medical expenses every month to the employer. Then the employer reimburses the amount up to the limit of Rs 15000 to the employee without tax deduction.

Medical allowance tax exemption is claimed when filing the ITR or Income tax return of a particular year. The standard deduction was reintroduced under the Income Tax Act and the budget for FY 2018-19. The travel and medical allowances benefits were discontinued from FY 2018-19 and clubbed under the standard deduction or medical allowance exemption limit for FY 2019-20. The Standard Deduction is presently from the FY 2019-20 capped at Rs 50000 per annum.

Allowance and Reimbursement vs Exemption

A majority of the employees are confused with medical reimbursements and exemptions of the medical allowance. The medical allowance is laid out as part of the salary structure, with medical reimbursement being made by the employer to the employee on producing the original medical vouchers/bills. Thus it is a fixed component of the salary received every month and is taxable as income from salary. 

  • When claiming exemptions of medical allowance, no bills need to be produced. The medical reimbursement made by the employer to the tune of Rs 15000 p.a. is a tax-free salary component. It is exempt under the IT Act up to the lower amount of the limit of Rs 15000 p.a. or the amount spent by the employee.
  • It is best to use the term ‘medical reimbursement’ instead of ‘medical allowance’ since the two terms imply different treatment under the 1961 Income Tax Act. Note that allowances are taxable, whereas reimbursements are tax exempt. Medical reimbursement is covered in the IT Act under Section 80D, which sets a maximum of Rs 15000 per year. 
  • When medical vouchers/ bills are not submitted to the employer on time every month, 30 percent of the Rs 15,000 allowable per annum becomes taxable. But, this 30% can be claimed by the employee when filing the ITR. 

All medical reimbursement may be scrutinized by the IT department and the company auditors. The employer has the responsibility to reimburse the medical vouchers/bills on the monthly production of the same by the employees. When the employer does not deduct taxes on reimbursed amounts for which the original bills are not submitted, penalties may apply.

Medical Allowance Exemptions

Medical allowance is fully taxable in the hands of the employee. The tax exemption on medical reimbursements made by the employer is available as medical allowance exemption u/s 10 of the IT Act, to a limit of Rs 15000 pa

The exemption and reimbursement can only take place after the employee incurs the medical expenditure. Medical treatment abroad when the employee is provided medical allowance and no monthly medical reimbursements will be considered a taxable salary component of the employee.

The Budget 2018 revised the medical reimbursement and travel allowance exemption amount from Rs 15000 to Rs 19200 per year. Standard deduction of Rs 40000 p.a. replaced this from April 1st of 2018 from FY 2018-19 onwards. The government raised the FY 2019-20 standard deductions applicable to Rs 50,000 p.a. in the Budget of 2019. Thus the limitations of Rs 15000 per year applies to FY 2017-18.

Taxability Of Medical Allowance

  • Tax is not levied on medical reimbursement up to Rs. 15,000 if all bills are submitted to the employer on time monthly.  (medical allowance exemption u/s 10 of the IT Act).
  • When an employee furnishes medical bills to the employer U/S Clause (b) of S17 (2) of the IT Act, 1961, no tax is levied on the medical reimbursements of Rs 15000 per year.  
  • The medical expenditure abroad incurred by the employee or the family members of the employee is fully tax-exempt. No restrictions are placed on treatment methods, whether ayurvedic, homoeopathic or allopathic, when claiming the tax exemption.
  • Also, the taxability of medical allowance and medical reimbursement is tax-free if the treatment of the employee/ h is family member is at the following hospitals:
  • The employer maintains the hospital.
  • A hospital maintained by State/ Central Government/ LA-Local Authorities.
  • Government-approved hospitals.
  • Income Tax Chief Commissioner approved hospital.

Fixed Medical Allowance

Some employers pay a fixed medical allowance in salary and not medical reimbursements. Such amounts are fully taxable even when involving the medical expenditure of the employee. For example, pensioners of the Central Government who reside in non-CGHS areas are paid Rs 500 p.m. as a fixed medical allowance. 

Fixed medical allowance is taxable. Medical reimbursements, on the other hand, are non-taxable up to Rs15000 p.a. Thus medical reimbursement is a better option than FMA or Fixed medical allowance in salary slip from the tax point of view.

Calculation of Medical Allowance and exemption

Note that the maximum tax exemption claimable is Rs 15,000 p.a. for medical expenditure incurred by an employee.

For example, suppose Raj is a 35-year-old software engineer and entitled to employer medical reimbursement of Rs 30,000 .pa. In that case, he has to produce original vouchers/ bills for Rs 30,000 to his employer for medical reimbursement of Rs 30,000. However, the tax-exempt limit is only Rs 15,000 for all bills of Rs 30,000 produced by him.

 

Also Read: Special Allowances in India- Taxation and Calculation 

The Bottom Line

The article has discussed briefly what is meant by medical allowance, medical reimbursement and medical allowance tax exemptions. The medical allowance and travel allowance were clubbed together as standard deduction up to Rs 40000 per annum in the 2018 Budget.  It was further increased to Rs 50000 per annum in the 2019 Budget. 

When you need to compute your salary components like medical allowance when filing your ITR, whether medical reimbursements, Mediclaim premiums or medical allowances tax exemptions, you should exercise great caution. That’s why you need a reputed app like the KhataBook app, which tracks and helps compute your salary, its components and taxable burden. Use it for happy filing of ITRs.

FAQs

1. I am ex-military and receive 2 pensions. How much medical allowance do I get?

Pensioners with 2 pensions are eligible for a single medical allowance only when they do not use the organization’s medical facilities. Since you receive military and civil pensions and use medical facilities of the civil/military organization, you are not eligible for the organization’s medical allowance. However, if you opt not to use the organization’s medical facilities, you can get reimbursement from military or civil medical facilities.

2. Can I claim the previous year’s medical expenditure?

Medical reimbursement by the employer is on the employee’s incurred medical expenses in that particular financial year only. Hence the previous year’s medical reimbursement is not valid.

3. When is medical reimbursement tax-exempt? 

Medical reimbursement is tax-exempt when the hospital is maintained by the employer/ state or central governments/ local authorities or if the Income Tax Chief Commissioner approves the hospital.

4. Can the Mediclaim premium paid by individuals be considered under medical reimbursement?

No. Mediclaim premiums paid are not treated as a medical expenditure. Hence, there can be no medical reimbursement for it from the employer. It can, however, be claimed as an income tax deduction U/S 80D.

5. What is the maximum tax-exempt limit for medical reimbursements?

The maximum limit of medical reimbursements by an employer is capped at Rs15000 pa.

6. How does a salary calculator help me?

You can use the IT department’s calculator when filing the ITR, which automatically uses the standard deduction of medical and travel allowances post 2018 to compute your tax liability. Some apps like the Khatabook app track your salary, help calculate the individual salary components, and plan your tax liability and filing well in advance.

7. Why do I need to submit original bills for medical expenditure to my employer?

When medical vouchers/ bills are not submitted to the employer on time every month, 30 percent of the Rs15,000 allowable per annum becomes taxable. But, this 30% can be claimed by the employee when filing the ITR. Note medical bills submitted are subject to the IT Department and company auditor’s scrutiny

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