Medical Allowance in Salary: Everything You Need to Know

Are you curious about medical allowance in salary? Well, you’ve come to the right place. In this article, we’re going to delve into the world of medical benefits and their tax implications. We’ll explore what medical allowances are, how they work, and why they matter. So whether you’re an employee wondering about the perks of having medical allowances or an employer trying to navigate the intricacies of offering such benefits, sit back and get ready for a crash course on understanding the ins and outs of medical allowances in salary!

What is Medical Allowance in Salary?

Medical allowance refers to a fixed allowance paid to employees by their companies on a monthly basis, regardless of whether they submit bills to substantiate their medical expenses or not. On the other hand, medical reimbursement involves reimbursements made to employees against specific medical bills they submit, subject to entitlement.

In order to benefit from tax incentives, employees must submit monthly bills for medical reimbursement equivalent to the incurred expenses. Under the Income Tax Act, medical allowance is not classified as an allowance that qualifies for exemption. As a result, medical allowance is fully taxable. However, employees can claim a tax benefit of up to Rs. 15,000 under medical reimbursement by providing valid bills or supporting documents.

What Is the Difference Between Medical Allowance and Medical Reimbursement?

Medical allowance and medical reimbursement are terms often used interchangeably, but they actually have different implications for tax purposes under the Income Tax Act of 1961. Experts recommend referring to the medical component of an employee’s salary as “medical reimbursement” rather than “medical allowance” because the latter is usually taxable unless there are specific exemptions.

Under the Income Tax Act, medical reimbursement falls under Section 80D, and the maximum amount allowed per year is Rs. 15,000. It’s crucial for employees to timely submit their medical reimbursement bills, as failure to do so may result in 30% of the Rs. 15,000 becoming taxable. However, employees can claim back 30% of the deducted amount when they file their tax returns.

To ensure compliance, auditors and officials from the IT department closely examine medical reimbursements. Employers are responsible for making these reimbursements to employees once valid bills are provided to claim the tax-exempt status. Notably, failure to deduct taxes on amounts without submitted invoices may lead to penalties related to Tax Deducted at Source (TDS).

Types of Medical Allowances

Depending on the company policy and nature, medical allowances fall into 3 categories: Fixed Medical Allowance, Mediclaim Policy and Medical Reimbursement.

Let’s learn them in detail:

1. Fixed Medical Allowance: This refers to a fixed amount paid by employers to employees as part of their salary. Irrespective of whether this amount is spent on medical costs or not, it is taxable. For example, if an individual’s salary includes a medical allowance of Rs. 5,000, they will be taxed if their total income falls under the taxable income bracket for that financial year.
2. Mediclaim Policy: Health Insurance: Employers often provide a mediclaim policy exclusively for the employee. Employers can claim this amount in their corporate return.
3. Medical Reimbursement: In this case, employees are required to submit medical bills, including the cost of medicines, to their employers. Employers then reimburse the claims after verifying the bills on an actual basis.

Latest Update on Medical Reimbursement

In the budget for the financial year 2018-19, the Finance Ministry of India reintroduced the standard deduction under the Income Tax Act, eliminating the medical reimbursement of Rs. 15,000 and travel allowance of Rs. 19,200. However, the medical allowance now falls under the standard deduction, which was raised from an initial Rs. 40,000 to Rs. 50,000 per year, effective in 2019. The standard deduction refers to a flat deduction from the gross salary that is not subject to tax. It can be used to lower taxable income and reduce the total tax liability. Salaried individuals and pensioners can benefit from this deduction. It is important to note that taxpayers following the new tax regime cannot claim the standard deduction under Section 80TTA/80TTB.

Eligibility to Claim Medical Expenditure

To claim medical allowance or reimbursement, certain criteria must be met:

• The medical allowance must be included in the employee’s pay package.
• You must submit the original medical bills and receipts to your employer as evidence of your expenditures.
• Medical allowance can only be claimed for oneself or immediate family members, including spouse, children, parents, and dependent siblings.
• The maximum limit for medical allowance is usually Rs. 15,000 per year.

How to Calculate Medical Allowance in Salary?

For example, if an individual submits medical expense bills worth Rs. 30,000, the employer will reimburse the full amount as per the company policy. However, Rs. 15,000 will be deducted as medical reimbursement from the taxable income of Rs. 30,000.

Procedure to Claim Medical Allowance

To claim medical allowance or reimbursement, employees need to submit the original bills of their medical expenses to their employers. After verifying these bills, the employer will reimburse the amount, with a maximum limit of Rs. 15,000, without deducting tax.

Medical Allowance Exemption

Medical allowances are usually exempt from income tax, which means that the money received is not subject to taxation. In India, Section 10 of the Income Tax Act provides several exemptions for income tax. According to the medical allowance exemption in Section 10, employees do not need to include the medical allowance they receive in their taxable income.

To qualify for this exemption, here are some important guidelines to follow:

• Employees should provide invoices or receipts as evidence of medical costs.
• Pay stubs or official documents should show details of the medical allowances.
• The medical allowance must not surpass the actual medical costs incurred.
• The medical allowance must be used solely for medical expenditures and not for other purposes.

Frequently Asked Questions (FAQs)

1. What is a medical allowance exemption under Section 10?

   The Medical Allowance exemption, as per Section 10 of the Income Tax Act, offers a tax exemption of up to Rs. 15,000 per year for employees who submit authentic medical bills to their employers as evidence of the expenses incurred.

2. What is the maximum limit for medical reimbursement?

   Medical reimbursement can be claimed up to a maximum of Rs. 15,000 per year.

3. Under what conditions is medical reimbursement exempt from tax?

   Medical reimbursement will be exempt from tax if the hospital is maintained by the employer, local authorities, state government, or central government, or if it is approved by the government or the Chief Commissioner of Income Tax.

4. Can I raise a claim for medical expenditures from the previous year?

   Employers can reimburse employees only for the medical expenditure incurred in the current financial year and not for any previous years.

Final Thoughts

Medical allowances in salary are an important aspect of employee compensation that can greatly impact one’s overall financial well-being. It is crucial for both employers and employees to have a clear understanding of how these allowances work and what they cover. By knowing the specifics of medical allowances, individuals can make informed decisions about their healthcare needs and expenses.
Whether you are negotiating a new job offer or discussing benefits with your current employer, it’s essential to ask questions and seek clarification to ensure you are receiving the appropriate medical allowances for your circumstances. Remember, knowledge is power when it comes to navigating the intricacies of medical allowances in salary – so don’t hesitate to explore your options and advocate for yourself!