I got the following info from the discussions on this site, but I'm not sure about which law allows this. This was under discussion in an audit:
Medical Insurance and Allowances
In respect of employees who are covered by ESI Schemes, you have no confusion, I believe. Now, in respect of those who are not under ESI, it is not mandatory that the employer should provide any medical insurance. As you said, it is okay if you pay a medical allowance of Rs 1250 every month along with the salary. It is not compulsory that in case of sickness the employer should bear the expenses. However, in case of an accident while on duty (I repeat, while on duty), the employer is liable to meet the expenses and even pay the compensation for partial disablement as is provided under the Workmen's Compensation Act. At the same time, if the employer had taken insurance suitable to cover such accidents, naturally, the cost would have been less. In the case of accidents resulting in death, also, the employer has to bear the cost.
Insurance Policies and Premiums
Medical allowance as a component of salary will not serve the above purpose for which separate accident/death cum hospitalization policies should be preferred. The cost of it, i.e., the premium, should be paid by the company and not be recovered from the employee. It is okay if you recover the premium paid concerning any mediclaim policy intended to cover hospitalization expenses of the employees and their family.
Regards,
Madhu.T.K 13th February 2013 From India, Kannur