Understanding Medical Allowance vs. Medical Reimbursement: How Do Tax Exemptions Work?

Dear Friends,

Can you please advise on the difference between these two components of salary - Medical Allowance & Medical Reimbursement, and how tax exemption can be claimed under each of these? Can employees claim tax exemption to the extent of medical bills submitted if they are receiving a fixed Medical Allowance every month?

Thanks & Regards,
Lakshmi

Medical allowance is a fixed allowance paid every month to the employees, irrespective of whether they submit the supporting bills or not.

Medical reimbursement is a payment made to an employee against the medical bills produced by him/her, subject to his/her entitlement. The maximum tax benefit available is Rs. 15,000 per annum.

To help your employees claim tax benefits, kindly advise them to submit bills for the amount of allowance received every month so that there is no problem. Further, you should rename the allowance being paid from "medical allowance" to "medical reimbursement."

Hope this helps you.

Thanks & Regards,
Avika Kapoor
Manager - Business Development
Kapgrow Corporate Advisory Services Pvt. Ltd.
E-173, Kalkaji, New Delhi - 110019
011-40553774
09310270884
avika.kapoor@kapgrow.com

Agreed with Avika. All allowances are taxable, whereas in the case of reimbursement, you need to ask for supporting documents.

Friends, thank you for the clarification. I just have some more queries though.

I understand that Medical Allowance is taxable, and medical reimbursement is not taxable to the extent of bills submitted. Is it legal to pay it as a medical allowance and not deduct any tax by collecting the medical bills? Is it okay if we are paying a fixed amount, and it doesn’t tally with the bills submitted for that month? Also, you have stated that we can rename the allowance paid from Medical Allowance to Medical Reimbursement. Can you please let me know how we can do this? Is it done at the end of the year? Will the auditors accept this kind of process? What should we state in the monthly Payslips – Medical Allowance or Medical Reimbursement?

Many thanks,
Lakshmi

Avika,

I am Nilesh, working in an MNC. My problem is that our company tells us to declare our investments and medical bills, but at that time, I had not declared anything. Now, I found that I got 5000 less of my salary. Can you explain to me what the reason might be?

Thanks,
Nilesh

If you have not declared your investments that are eligible for tax deduction and the amount of medical bills you would be submitting, the employer must have deducted tax at source from your salary. You should talk to your HR/accounts department, whoever is processing the salary, as to why they have deducted the amount. Then you should provide them with the details of investments such as life insurance policies, housing loan repayment (principal and interest), PPF, PF, GSLI, NSC, tax-saving FD, pension policy, mediclaim policy, education loan, ULIP, etc., along with the amount of medical bills.

If they have deducted on some other account, please provide the details so that I can help you.

Thanks & Regards, Avika

Hi Everybody,

Medical Allowance is a fixed payment by the employer to the employee every month, and it is fully taxable. However, in the case of medical reimbursement, employees will receive tax benefits of up to ₹15,000 per annum.

Medical allowance or reimbursement should be fixed at the time of fixing CTC. If it is an allowance, then bills cannot be entertained. Always fix Rs. 15,000 as medical reimbursement and get a bill for that amount from employees.

Some information to queries by Lakshmi:

1. Reimbursements are payments for bills/supporting documents, whereas allowances are fixed payments made month on month regardless of bills. The Indian Tax system provides exemptions for certain allowances, such as conveyance allowance, children education allowance, uniform allowance, etc., under section 10(14). Any other allowance is taxable. Medical reimbursements made to employees are not taxable up to Rs. 15,000 per tax year.

In effect, an employer can reimburse more than Rs. 15,000 per tax year to an employee against medical bills, but the amount exceeding Rs. 15,000 would be taxable to the employee.

2. If a fixed amount (i.e., allowance) is paid, and bills submitted against the amount do not add up to the allowance amount (within the Rs. 15,000 limit), then the difference amount must be taxed in the hands of the employee.

3. Tax deductions by the employer for the employee's salary income are typically completed in March, the end of the tax year. If it is possible to deduct tax in the last month for the remaining part of medical reimbursement (for which bills were not produced), then the practice of requesting bills before the last month would be acceptable.

Better Practices:

Option 1: Maintain medical reimbursement separately from the payslip as a facility. An employee can claim medical reimbursement up to Rs. 15,000 in a tax year. If the employee submits bills, reimbursement will be provided; otherwise, no amount will be given.

Option 2: Introduce a pay component called Medical Reimbursements, obtain bills from employees, and pay the amount against the bills as non-taxable (up to a maximum of Rs. 15,000 per tax year), with the remaining amount being taxable.

Consequences of Non-Compliance for the Employer:

If the employer fails to deduct taxes properly, considering the amount (for which no bills have been provided) for taxing employees, there could be TDS-related penalties.

Medical Reimbursement and Medical Allowance are totally different things.

Medical Allowance: It is a fixed monthly allowance paid in your monthly salary and it is added in your taxable income (which means it is taxable).

Medical Reimbursement: As name suggests it is a reimbursement of medical expenses incurred by the employee. In case of Medical Reimbursement, employee is required to submit the cash memos, bills to employer to claim the reimbursement. After verification of bills employer reimburses employee, subject to pre-decided limits. Medical Reimbursement up to Rs. 15000 p.a. is exempt from Income Tax.

Since you are already paying Fixed Monthly Medical Allowance to employees, I would like to suggest you a method by which, employees who are actually incurring medical expenses can save some Income Tax.

Assuming that you are paying Rs. 1000 pm as fixed Medical Allowance, you can change your policy and start paying Medical Reimbursement of Rs. 12000 p.a. Employees will have to submit bills, cash memos to claim the Medical Reimbursement. You will have to maintain the record of each individual employee as regards his limit and actual reimbursement claimed. At the end of the year in case employee has some unclaimed balance in his account, same can be paid as one time Medical Allowance and obviously it will be added in taxable income.

For example an employee claims Rs. 8920 as a Medical Reimbursement during the year. His unclaimed balance is Rs. 3080. He will be paid Rs. 3080 as one time Medical Allowance in the last month and since it is allowance it will get added in his taxable income.

Hope my suggestion works for you.

Please note that, it is employer's responsibility to pay Medical Reimbursement only against authentic bills, cash memos to claim exemption from Income Tax. This reimbursement is open to audit and scrutiny by both Tax Auditors and IT Dept.

Thanks & Regards

Can medical reimbursement be paid on a monthly basis and bills for the same collected by the employee?

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Can medical reimbursement be paid on a monthly basis, and can the employee collect bills for the same?

Hi,

Based on my experience with medical bills in our company, we submit bills to be paid accordingly for the respective months. This means that the amount of the bill you submit will be reimbursed in the respective month's salary.

Thanks,
Nilesh

Can anyone tell me if, in the salary break-up, medical reimbursement or medical allowance is not taken, can the company give the employee a deduction under section 10 for Medical Allowance of Rs. 15,000/- (subject to submission of original medical bills)?

Please reply, it's urgent.

Thanks & Regards,
Anagha

I joined a new organization in December 2014, where I have medical reimbursement as a salary component. I wanted to know if the bills submitted could only be for my employment duration with my new organization, or if I could submit the ones for the entire financial year. I am submitting the proofs in my new organization.

Thanks,
Priya Bhauka.

Suppose an employee is eligible for a 15,000 INR medical reimbursement, but he was without pay for, say, 15 days in the year. Should the medical reimbursement be calculated accordingly?

Hello,

Please tell me whether reimbursement is taxable or not, and also provide a list of reimbursements given by the company.

Last year, I was not provided with medical allowance. This year, I noticed that $2500 was deducted from my salary, and the medical allowance is now zero on the new CTC. Could you please share the reason for this change?

Hi friends,

Can we include the medical allowance in the salary bifurcation for those who are covered under ESI?

Thank you.