Medical / Health Insurance Premium - Mediclaim deduction under Section 80D

Section 80D of the Income Tax Act provides for deduction of Health Insurance premium or Medical Insurance premium or Mediclaim premium from Gross Total Income. Just like Life Insurance premium payment can help you save tax under Section 80C, even Medical Insurance premium payment can also help you save tax under Section 80D.

Note that the Income Tax benefit available for Medical Insurance premium under Section 80D is separate and distinct from the tax benefits available under Section 80C. To know more about section 80C deductions.

Eligible Assessees

Individuals and Hindu Undivided Family (HUF) only.

Scope

Mediclaim premium paid under:

• Medical insurance scheme of General Insurance Corporation approved by the Central Government, or
• Any other insurer approved by the Insurance Regulatory & Development Authority (IRDA).

Coverage

• For an Individual: Premium paid for insuring the health of the Individual, Spouse, Parents and dependant Children. Note the criterion of being dependant on the assessee is applicable only for Children. Thus Mediclaim premium paid for covering health of spouse or parents would be available regardless of whether or not they are dependant on the assessee. (Note prior to 1st April 2009, deduction for Mediclaim premium paid for parents was allowed only if the parent was dependant on the assessee).

• For a HUF: Premium paid for insuring the health of any member of the family.

Payment from Taxable Income

Mediclaim premium has to be paid from taxable income of that year to claim deduction u/s 80D. Premium should not be paid from savings or gifts received.

Mode of Payment

The premium may be paid by any mode of payment other than cash. Note prior to 1st April 2009, premium payment was required to be done only by cheque. Credit card or other online payment mechanism where not allowed. Now all payment modes except cash payment are accepted.

Deduction

For Individual

• Basic deduction: Mediclaim premium paid for Self, Spouse or dependant children. Maximum deduction Rs 15,000. In case any of the persons specified above is a senior citizen (i.e. 65 years or more as of end of the year) and Mediclaim Insurance premium is paid for such senior citizen, deduction amount is enhanced to Rs. 20,000.
• Additional deduction: Mediclaim premium paid for parents. Maximum deduction Rs 15,000. In case any of the parents covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

For HUF

• Mediclaim premium paid for any member of the HUF. Maximum deduction Rs 15,000. In case any member of the HUF covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

Let us now understand the implications with the help of examples:

Example 1

Mr. Anil furnishes the following information relating to premium on Mediclaim policy paid by cheque:

• For self (age 40 years) - Rs. 12,000
• For spouse (age 36 years) - Rs. 10,000
• For father (age 68 years) - Rs. 17,000
• For dependent mother-in-law (age 66 years) - Rs. 15,000

What is amount of deduction allowed under Section 80 D of the Income Tax Act?

Mr. Anil paid total of Rs. 22,000 for self and spouse. Since neither of them are Senior citizen, basic deduction under Section 80D is Rs. 15,000 (premium paid Rs. 22,000 or Rs.15,000 whichever is less).

Mr. Anil also paid Rs. 17,000 for his father, which is eligible for additional deduction. Since his father is senior citizen, deduction under Section 80D is Rs. 17,000 (premium paid Rs. 17,000 or Rs.20,000 whichever is less).

Thus total deduction under Section 80D comes to Rs. 32,000.

Note that Section 80D does not cover relatives other than Spouse, Children and Parents, so the premium paid by Mr. Anil for his dependent mother-in-law isn’t eligible for deduction. However, his wife can, from her taxable income, pay the premium for her mother’s health plan and claim deduction under Section 80D for the same.

Example 2

An individual assessee pays through Credit Card during the previous year health insurance premium as under:

1. Rs. 12,000 to keep in force an insurance policy on his health and on the health of his wife and children
2. Rs. 17,000 to keep in force an insurance policy on the health of his parents.

Under the proposed new provisions, he will be allowed a deduction of Rs. 27,000 (Rs. 12,000 + Rs. 15,000) if neither of his parents is a senior citizen. However, if any of his parents is a senior citizen, he will be allowed a deduction of Rs. 29,000 (Rs. 12,000 + Rs. 17,000). Whether the parents are dependent or not, is not a consideration for deciding the deduction under Section 80D.

SMI TAX PLANNING TIPS

• Make the premium payment from your taxable income. Mediclaim insurance premium should be out of income chargeable to income tax, meaning if payment is made from income exempted from income tax than deduction will not available. If payment is done from a Loan or Gift, then also deduction is not available.

• Mediclaim policy for Brother or Sister? In case you need to pay Mediclaim insurance premium for your brother or sister, do not make the premium payment from your account. Take Mediclaim policy for Brother or sister in your Hindu Undivided Family (HUF) Income Tax file. If you are taking a floater policy, then don’t add your brother or sister in the floater policy if you are making the premium payment. Include your brother and sister in the Mediclaim policy where the premium payment is done by the HUF. This will ensure that HUF would be eligible for the deduction under Section 80D.

• Floater Mediclaim policy. Unique policies have been devised today by various insurance companies to suit the requirements of families. The family floater plan is the best example of such plans. This helps you and your family enjoy coverage under one single policy. For example, if you purchase a 3 lakhs health insurance policy, every member of your family can avail of the entire sum insured during medical requirements. Pay the Mediclaim premium for floater policy for your family from the Income Tax file where the deduction would have maximum tax savings. Let me explain by way of an example. Suppose your taxable income is greater than Rs. 1,000,000 and your spouse has taxable income of Rs 200,000. Medical insurance premium for the floater policy is Rs 10,000. If the premium is paid by your spouse, deduction under Section 80D is Rs 10,000. Note applicable Income Tax rate for your spouse is 10% plus 3% Education Cess. Thus reduction in tax liability due to this deduction of Rs 10,000 is equal to 10,000 * 10.30% = Rs. 1,030. On the other hand applicable Income Tax Rate for you is 30% plus 10% Surcharge plus 3% Education Cess. Thus if the premium payment is made by you, deduction available is same at Rs 10,000 but the effective saving in tax liability is 10,000 * 33.99% = Rs. 3,399.

• Don’t make premium payment by cash. No deduction under Section 80D is allowed where the Mediclaim premium is paid in Cash. You can make the payment in any other mode like cheque, draft, credit card, online banking, etc.

• Let your spouse pay the Mediclaim premium for your in-laws. In case you are also taking care of healthcare need of your in-laws, make sure the premium payment for Mediclaim policy is done by your spouse. You will not get any deduction under Section 80D for Mediclaim premium for your in-laws. But if your spouse is making the payment, Section 80D deduction is available since your spouse would be making payment for his / her parents which is allowable under Section 80D. Please note your spouse has to make the payment from his / her taxable income.

• One policy, Two claimants. If part payment is done by you and part payment by the parent, both can claim deduction to the extent of their contribution, subject to maximum allowed. Thus for example, if cost of insurance on the health of the parents is Rs 30,000, out of which Rs 17,000 is paid (by any non-cash mode) by the son and Rs 13,000 by the father (who is a senior citizen), out of their respective taxable income, the son will get a deduction of Rs 17,000 and the father will get a deduction of Rs 13,000.

• Unit-linked Health Insurance Plans. Some of the insurance companies have launched unit linked health insurance plan which work akin to Unit Linked Life Insurance plans. Portion of the premium for unit linked health insurance plan would go for covering the health insurance cost and balance would be invested in funds chosen by the person insured. For example LIC, has launched “Health Plus” and Tata AIG has launched “Tata AIG Life InvestAssure Health”. As per the current tax rules, premiums paid in respect of morbidity are eligible for tax deduction under Section 80D of the Income Tax Act. The balance of premium is eligible to tax deduction under Section 80C, provided the annual premium during the year does not exceed 20% of the sum assured.

Appendix: Section 80D of the Income Tax Act

Deduction in respect of medical insurance premium.

80D. (1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted such sum, as specified in sub-section (2) or sub-section (3), payment of which is made by any mode, other than cash, in the previous year out of his income chargeable to tax.

(2) Where the assessee is an individual, the sum referred to in sub-section (1) shall be the
aggregate of the following, namely:—

(a) the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or his family as does not exceed in the aggregate fifteen thousand rupees; and

(b) the whole of the amount paid to effect or to keep in force an insurance on the health of the parent or parents of the assessee as does not exceed in the aggregate fifteen thousand rupees.

Explanation.–For the purposes of clause (a), “family” means the spouse and dependant children of the assessee.

(3) Where the assessee is a Hindu undivided family, the sum referred to in sub-section (1) shall be the whole of the amount paid to effect or to keep in force an insurance on the health of any member of that Hindu undivided family as does not exceed in the aggregate fifteen thousand rupees.

(4) Where the sum specified in clause (a) or clause (b) of sub-section (2) or in sub-section (3) is paid to effect or keep in force an insurance on the health of any person specified therein, and who is a senior citizen, the provisions of this section shall have effect as if for the words “fifteen thousand rupees”, the words “twenty thousand rupees” had been substituted.

Explanation.— For the purposes of this sub-section, “senior citizen” means an individual resident in India who is of the age of sixty-five years or more at any time during the relevant previous year.

(5) The insurance referred to in this section shall be in accordance with a scheme made in this behalf by—

(a) the General Insurance Corporation of India formed under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government in this behalf; or

(b) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

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.