Medical Expenses Allowance vs. Medical Expenses Reimbursement

"What's in a name? That which we call a rose

By any other name would smell as sweet."

- William Shakespeare, "Romeo and Juliet"

But sometimes a name can make a lot of difference. For example whether you are in receipt of Medical Allowance or Medical Reimbursement from your employer, will make lot of difference to your tax liability. Let’s understand by way of an example.

Mr. Smart is getting Medical Expenses Reimbursement from his employer to the extent of Rs. 15,000 every year. On the other hand, Mr. Fool is in receipt of Medical Expenses Allowance of Rs. 15,000 every year from his employer. As per provisions of the Income Tax Act, Mr. Smart will not have to pay any tax on the Medical Expenses Reimbursement, while the Medical Expenses Allowance will be fully taxable for Mr. Fool. Let’s understand in more details.

Medical Expenses Allowance

As a general principle under the Income Tax Act, any Allowance received by an employee is fully taxable unless specifically exempted. Thus for example House Rent Allowance is exempt only to the extent specified in Section 10(13A). There is no specific exemption for Medical Allowance, thus it is fully taxable and will be added to Income of the Employee and taxed at the applicableIncome Tax Rates. Thus if a fixed allowance is received by an employee for the discharge of medical expenses, it is a taxable perquisite. Hence, an employee should avoid the receipt of an allowance for medical expenses but should rather take medical reimbursement, so that it is tax-free.

Medical Expenses Reimbursement

Reimbursement of medical expenses actually incurred by an employee for his medical treatment or the treatment of any member of his family upto Rs. 15,000 per annum is not treated as a taxable perquisite as per Clause (v) of the Proviso to Section 17 (2) of the Income Tax Act. Family is defined to mean Spouse or Children of the Individual or any of dependant relatives being Parents, Brother or Sister. Note there is no requirement for Spouse or Children to be dependant on the individual, but Parents, Brother or Sister should be dependant on the individual. Thus Medical Expenses Reimbursement of expense actually incurred by an employee upto Rs. 15,000 per year is completely tax free. Note deduction under Section 80D for Mediclaim Insurance policy is over and above Medical Expenses Reimbursement being discussed here.

Typically if the employee fails to submit valid medical bills for the entire entitlement amount of Rs. 15,000 then the balance amount is paid by the company in the last month of the financial year (i.e. March) as a taxable amount. Thus to the extent medical bills are not submitted, Medical Expenses Reimbursement received from the employer would be taxable. For example an employee is entitled to Medical Expenses Reimbursement of Rs. 15,000 every year, but is able submit medical bills only for Rs. 10,000 for the year. In this case the company would pay Rs. 10,000 as Medical Expenses Reimbursement, which is not taxable. The balance amount of Rs. 5,000 would be paid in the last month and would be taxable.

SMI Tax Planning Tips

Most of the companies do have Medical Expenses Reimbursement as part of compensation package. However in case your Salary package doesn’t include this component, then it would be prudent from tax-planning perspective to get Medical Expenses reimbursement included. Most often employer is more concerned about the overall compensation payable to the employee and would not be too bothered about how the overall amount is structured. Thus whether the Rs. 15,000 is paid as Special Allowance or Medical Expenses Reimbursement, would hardly have any impact on the employer but can lead to some tax savings for the employee.

Instead of fixed Medical Allowance, always opt for reimbursement of Medical Expenses. For claiming reimbursement, you will be required to submit valid medical bills to your Employer. Some companies, instead of taking actual physical medical bills from the employees, just take declaration to the effect that the employee has actually incurred medical expense for self or family. In this case the Employee is required to maintain the actual medical bills and may be required to present the same to the Income Tax authorities in case of any scrutiny of the Income Tax Return.