Medical Allowance Exemption: What Every Taxpayer Must Know
Difference between Surcharge and Cess Of The Income Tax
28 April 2022
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29 April 2022As per the Income Tax Department norms, individuals are required to pay their income tax dues as per the tax slab they fall into. However, did you know that your entire salary is not taxable? For instance, the exemptions under standard deductions today were available as transport and medical allowance exemption till AY 2018-19. These exemptions significantly helped in lowering a taxpayer’s taxable income.
Read through the following sections to know more about this tax exemption.
Table of contents
What Is Medical Allowance?
Medical allowance is a type of fixed allowance received by the employees each month even if they do not submit bills to substantiate the expenditure. Medical allowance is included in employee’s salary every month. This allowance throws light on the importance of health of the staff of an organisation and helps them support their medical expenses.
Difference between Medical Allowance and Reimbursement
Many individuals use the terms medical allowance and medical reimbursement interchangeably. However, they feature different tax treatments as per the Income Tax Act.
Having said that, medical allowance is a part of an employee’s salary. Whereas medical reimbursement is the amount that an employee receives from his/her employer after submitting required medical bills.
Thus, medical allowance, being a fixed part of your salary, is taxable as per the tax slab you fall into. Meanwhile, reimbursement is a tax-free component, featuring an exemption up to Rs. 15,000.
Here is an example to clarify this point further –
Mr X works for ABC Ltd, and his monthly medical expenses are Rs. 10,000. Now, once he submits the required bills to his employer for income tax deductions, it will bring his taxable income down by Rs. 10,000. Whereas his monthly medical expenses are Rs. 20,000, and his employer reimburses the total amount as a part of his salary. In that case, Mr X is eligible for an income tax deduction of up to Rs. 15,000 and the remaining Rs. 5,000 will be taxed as per the applicable deduction.
Eligibility Parameters to Claim Medical Allowance Exemption
To be eligible to claim medical allowance exemption in income tax, individuals had to meet the following parameters:
- An employee must have spent the allowance on medical treatment only
- An employer must have reimbursed the amount
- An employee must have spent the amount for his/her own medical treatment or treatment relating to his/her spouse, children or parents.
Wondering how much medical allowance was exempt from tax?
Upon meeting the eligibility, a taxpayer was allowed to claim a maximum of Rs. 15,000 exemption for medical allowance.
Note: Note that the provisions of medical allowance exemption are no longer valid. During the annual budget announcement of 2018, the finance minister reintroduced the standard deduction provisions. Thus, from FY 2019-20, the medical allowance exemption is not a standalone tax-saving measure.
Also Read: Understanding Health Insurance Claim Settlement Ratio In India
Tax-Free Prerequisites under Section 17(2)
As per Section 17(2) of the Income Tax Act, a prerequisite is any kind of benefit attached to an employee’s salary. It can be extended in cash or kind. Further, they are taxable only if the prerequisites are:
- Provided while one continues employment
- Provided by an employer to the employee
- Extending personal advantages to the employee
- Depends on the service
- Provided as the result of the authority of the employer
Moreover, the following things fall under the prerequisites according to Section 17(2) of the Income Tax Act:
- Rent-free accommodation offered by an employer to his/her employee
- Concession value concerning the rent of an accommodation provided by an employer to his/her employee
- An amenity’s value, if provided at a discounted rate in any of these cases:
- A company to an employee who happens to be a director
- A company to an employee with massive interest in the firm
- By an employer to his/her employee, to which the above-mentioned pointers do not apply. Additionally, an employee whose salary income is more than Rs. 50,000 excluding amenities and benefits.
- An amount that an employer pays as an obligation
- Any amount that an employer pays through a fund or directly for the reason of an annuity contract or assurance on the employer’s life
- Contribution to a superannuation fund by an employer to his/her employee exceeding Rs. 1,50,000
Prerequisites for Medical Treatment Abroad
The following pointers detail the medical allowance exemption under Section 17(2) of the Income Tax Act:
- Prerequisites provided to an employee as medical support in foreign countries for himself or his/her family members are free from tax.
- Travel expenses incurred by an employee or his/her family members will be tax-exempt if the employee’s gross income is less than Rs. 2,00,000.
- The cost incurred for an attendant’s accommodation will be tax-exempt as per RBI rules.
However, to avail of these benefits, an employee has to furnish a certificate from the concerning hospital. The said certificate must mention the nature of treatment and probable expenditures.
Also Read: What Is Section 80D Of Income Tax Act?
Final Word
The Income Tax Department has rolled out certain provisions to reduce the medical expenditure burden on employees. While the medical allowance exemption now stands suspended, you can still avail of tax exemption on your salary as per standard deduction provisions.
FAQs On Medical Allowance Exemption
Ans: As per the amendments of FY2020-21, salaried taxpayers can now claim a standard deduction on their total salary amount of Rs. 50,000, whichever is lower. Further, you can claim this deduction irrespective of their current spending.
Ans: Before the government introduced standard deduction, employees were eligible to claim a medical allowance exemption of Rs. 15,000 a year. In addition, they were allowed to claim an exemption for transport expenses worth Rs. 1,600 per month.
Ans: Medical reimbursement was tax-free if the hospital where an employee seeks treatment was run by local authorities, employers, and central or state governments. The reimbursement was also free from tax if the hospital featured approval from the Chief Commissioner of Income Tax.
Ans: Employees were able to receive medical reimbursement upon submitting all original medical bills to their employer. Upon approval, the company would disburse the expenses incurred as per the overall limit of Rs. 15,000, which was tax-free.
Ans: Employees were able to claim medical allowance exemption for themselves and their family members. Here, the term family refers to an employee’s spouse, children, parents and sisters and brothers. However, they must be dependent on the individual.
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