Is Medical Reimbursement Part of Gross Salary? Clarifying Monthly vs. Annual Claims and Deductions

Hi,

Is medical reimbursement considered part of your gross salary? I understand that Rs. 15,000.00 is the ceiling per annum. Should each month's medical bill amount to Rs. 1250, or can an employee show bills adding up to Rs. 15,000 for the financial year, irrespective of how much she spends each month? Currently, Rs. 1250 is getting deducted each month from her salary, and she is confident she can show expenses for Rs. 15,000.

In May 2007, this employee incurred expenses of Rs. 7000. In June and July, she had none. Is it alright that she did not draw Rs. 1250 for these 2 months, where she had no expense?

Please respond. Thanks in advance.

Dear BHR,

There are two issues which are absolutely different that I feel you are mixing up:

1) Medical reimbursement

2) Tax Exemption against Medical reimbursement.

1) Medical Reimbursement:

A company can pay any amount towards Medical Reimbursement or as Medical Allowance, and there is no bar to it. This forms a part of the Salary.

2) Tax Exemption:

An individual is entitled to tax exemption on the amount of actual expenditure incurred on Medical Grounds for him and his family, subject to a limit of Rs. 15,000/- in each Financial Year. This unclaimed amount cannot be carried forward. The tax benefit is given on the production of Medical Bills. In the absence of a bill, the amount can be paid after deducting TDS if applicable.

So, the monthly limit of Rs. 1250/- is irrelevant since the amount is on an annual basis, and the person should be reimbursed on the production of the actual bill up to a limit of Rs. 15,000/-. Hence, a person can use the whole amount of Rs. 15,000/- in the first month itself and avail tax benefits, and any further Medical reimbursement will not qualify for any further tax benefit for that Financial Year.

Regards,

SC

Hi,

Regarding the medical allowance for tax exemption of Rs. 1250/-, this component is a part of the gross. The employee has to produce the medical bills for Rs.1250/- per month. It depends on the organization whether they collect the bills on a monthly basis, quarterly, or annually. If it is monthly, then you need to furnish the bills, and if you don't, then this amount is not paid in that particular month; it gets carried forward. At the end of the financial year, if you are not able to produce the bills, the payroll adds the balance amount to the taxable component.

It depends on you if you have a consolidated bill of Rs. 15000/- at the beginning of the financial year. Then you can submit the bill at the end of the financial year because this is a monthly component and it cannot be paid in advance. Or you can check with your payroll team if this original bill of Rs. 15000/- is submitted in the month of April (you will get Rs. 1250/- per month, not 15000/- in one month). For the rest of the months, you attach a photocopy of the bill, mentioning that the original bill was submitted in April so that the payroll can track the original bills for audit purposes.

Hope this is clear.

Thanks,

Uttama

Thank you SC and Uttama for your answers.

To know if I fully understood your points, can I illustrate the following salary breakup for a person who is availing this benefit? For a salary of 20,000 a month: Basic - 8000 HRA - 6000 Conv - 800 Med allowance - 1250 Special Allowance - 3950 Total gross paid - 18750 (because he prefers to produce his bills at the year end) Can this be shown as his salary structure? Please let me know at the earliest.

Dear BHR,

Why do you need to show Medical Allowance monthly if you are not paying it?

You cannot stop payment of any allowance on grounds of non-submission of documents to avail tax exemptions. It is up to the employee to claim the benefits. The same can only be done in case of reimbursement.

Again, if you term it as reimbursement, the same can only be paid on submission of documents.

If you are giving it monthly, tax should be deducted. The employee can claim a tax refund directly from the Income Tax Department by submitting the medical bills along with the annual return.

What we follow is reimbursement on a quarterly basis on submission of actual bills. Our Employees are free to submit it either quarterly, half-yearly, or annually. Let me explain:

Suppose the quarters are: April (I), July (II), October (III), January (IV):

The employee can claim in any quarter and in any frequency subject to the limit of Rs. 15,000/-, i.e.:

- They can claim it once, i.e., I or II or III or IV,

- or I and IV,

- or II and IV,

- or I and III,

- or I and II,

- or III and IV,

- or II and III.

The balance amount, if any, is paid back to the employee at the end of the Financial Year, subject to TDS.

Revert if required.

Regards,

SC

Thank you SC. So, for a person who is availing this benefit on an annual basis, will his monthly gross salary be $18,750 ($20,000 - $1,250) with no mention of the $1,250 on any monthly salary head, except in March, where he gets the $15,000 as medical reimbursement?

If yes, his basic salary (which is 40% of gross) will be 40% of $20,000?

Thank you in advance for your time and support.

Regards, BHR

Dear BHR,

Kindly refer to my first reply. What I have described is how to let your employees avail tax benefits given by the Income Tax Act regarding Medical Expenditure, and nothing less and nothing more. As for your CTC and Salary, the company is free to determine as it deems fit, keeping in mind the current market practices and any statutes that may apply.

Lastly, there is no law stating that the Basic should be 40% of Gross Pay. CTC has no legal importance or binding. As I have stated in one of my previous posts on this site, CTC is purely dependent on the company, and the management is free to include or exclude what it wants because it holds no legal importance.

Regards,
SC

What are the medical bills required for availing medical exemption of Rs. 15,000 for the year?

Regards,
Roll

Hi, Regret for the delay.

Bills you can submit include pharmacy bills, doctor's consultancy fees, hospitalization bills, and receipts for any tests conducted.

Thanks, Uttama.

Greetings Swastik,

Thank you for your valuable inputs on medical reimbursements. I have 2 situations in my office. Please let me know if what we are doing is correct.

1. One employee draws Rs. 1250 less every month for 12 months (Apr to Mar). This amount is currently part of his gross salary, but since he is not drawing it, we show his gross to be less by Rs. 1250 every month. At the end of the year, he produces medical bills for Rs. 15,000. We pay him Rs. 15,000 additionally in the month of March as part of salary. Is this correct? While doing his income tax calculation, we show that this Rs. 15,000 is exempted from taxable income.

2. Another employee is paid his gross salary in full each month. At the end of the year (March), he submits bills for Rs. 10,000. This Rs. 10,000 is exempt from his taxable income. Were he to produce no bills, this Rs. 10,000 would be offered for taxation.

Are we following the right practices? Since medical reimbursement attracts fringe benefit tax, this benefit is offered only to senior members of the organization. The salary structure does not specify medical reimbursement. Please comment.

Thank you for your time.

Regards, BHR

Dear BHR,

FBT is applicable if the medical reimbursement limit is above INR 15,000. So, if you give your CEO INR 18,000, this additional INR 3,000 comes under FBT.

As for what you are doing, it is absolutely okay. The rule, as I have stated, is simple. In each financial year, an individual is entitled to an exemption to a maximum of Rs. 15,000 from his income on grounds of medical reimbursement. So, the term "reimbursement" means against the production of bills of medical expenditures incurred in that financial year. There is no provision for carry forward. So, as long as there are bills, the amount is exempted from tax to the prescribed limit.

Regards,
SC

Someone, please help me understand this. I want to know if I am paying $1250 per month towards medical as part of his gross salary, then what should I term it as – Medical Allowance? Or Medical Reimbursement? And when should I collect bills from the employee? On a monthly basis or on a yearly basis?