Understanding Medical and LTA Tax Deductions: Is Our Salary Procedure Correct?

Please let me know the procedure for medical and LTA tax deductions on salary. For example, our employees have a gross salary with medical (approx. 1250/-) and LTA (approx. 3333/-). We have deducted both components and instructed employees to submit the respective bills for reimbursement without tax. Is this procedure correct or incorrect? Please let me know.

Also, could you inform me how much tax needs to be deducted on medical and LTA annually when employees are unable to submit the bills for the financial year? Please provide clarification on this matter.

Regards,
Ashwini

Procedure for Medical and LTA Tax Deductions

1. Yes, the procedure you have followed is okay. Some companies follow this method of deducting the medical and LTA and only pay it to the employee at the end of the quarter/year or whenever they submit the bills. Some others pay the amount monthly even though the employee has not submitted the bill (they consider the amount as TAXABLE in this case). But adjust the tax amount as and when the bills are submitted from total income.

2. If Bills Are Submitted
Medical and LTA should be deducted from total income (to the extent bills have been submitted) and then the income tax should be calculated.

3. If Bills Are NOT Submitted
Medical and LTA should be added to total income and then the income tax should be calculated.

If the company provides a salary structure (Basic + HRA + Conveyance & Balance amount in Spl/Flexible Allowance), can the employee give a breakup on Spl/Flex allowance?

For example: Basic 10000 + HRA 4000 + Conveyance 800 + Spl/Flexi Allow 20000 (Can the employee take tax benefits by submitting medical bills for Rs 15000/pa)?

If the employee submits fake medical bills, who is responsible, the employee or the employer?

Please suggest...

Regards,
Bala

Yes, an employee can break the flexible allowance into a medical reimbursement of 15k only if the employer allows it. It is a good practice to allow employees this option as it helps them save tax. The employee is responsible for fake bills. However, the employer should also do a bit of bill checking to ensure that the bill is for medical purchases only. Cosmetics are not allowed and may be questioned by the IT department during the audit of your accounts.