The
Income Tax Act of India was established in India
in the year 1961 as the guiding principle for imposing and collecting income
tax from the citizens of India .
Among the income taxes defined are exemptions that can be used to reduce the
taxable income for a person.
Download Automated Income Tax Form 16 Part B for Financial Year2015-16 & Assessment Year 2016-17 [ This Excel utility can prepare at a time 50 employees Form 16 Part B after filling the Input sheet] This Excel Utility Fully Automatic and you can prepare more than 500 employees Form 16 Part B by this One Software]
One such exemption is medical allowance. It is an allowance that is provided
for under section 17(2) of the IT Act and states that an employee can submit
bills to the employers for medical treatment undertaken by them of their family
members.
Once the bills are submitted,
employers can reimburse an amount up to Rs.15,000 as per the rules. According to the IT Act, reimbursements of
medical allowances up to Rs.15,000 will not be considered as taxable income.
The key thing to remember is
that medical allowances and reimbursements should not be confused with medical
insurance, which is a completely different product.
Download Automated Master of Form 16 Part A&B for FinancialYear 2015-16 and Assessment Year 2016-17 [ This Excel utility can prepare at a time 100 employees Part A&B Form 16 ]
Terms Used in Relation To Medical Allowances:
There may be terms used in
relation to medical allowances and reimbursements that may tend to confuse
people so let’s first take a look at the terms and try to define them in the
simplest way possible.
Medical Allowance:
The medical allowance is just an
amount that is defined by the government. The purpose of this amount is to
provide employees with tax benefits in case they have had to spend on medical
procedures in the year. It can be claimed for treatment undertaken by an
employee or their families. Medical
allowance is taxable.
Medical Reimbursement:
Medical reimbursements are the
actual amount that the employer’s gives to an employee when they submit bills
for medical treatment availed. Medical
reimbursements are exempt from taxes till the limit defined by the IT Act,
which is Rs. 15,000.
Family:
For the purpose of medical
reimbursements a family is defined as the spouse and children of the employee.
The employee’s parents and siblings of the employee can also be considered for
such benefits but the condition is that they need to be completely dependent on
the employee.
Medical Allowance and Income Tax
Medical allowance for
reimbursements comes with a limit of Rs.15,000 per annum. This allowance can be
claimed when an employee, or the family of said employee, actually undergoes
medical treatment. Once the claim is submitted it turns from an allowance to a
reimbursement.
Many employers pay their
employees a fixed amount, in their monthly salary, as medical allowance. This
payment can be of Rs. 1,250 a month or Rs.15,000 a year. If the employee incurs
medical expenses then the amount up to Rs.15,000 is exempt from taxes. Any amount exceeding the medical allowance is not
exempt from tax and can be taxed at the appropriate rate according to the
employee’s tax bracket.
As far as taxation is concerned,
it must be remembered that the allowance is taxable but the reimbursements or
claims are not; up to Rs. 15,000. If no bills are submitted for reimbursement
or claims then a tax of 30% of the 15,000 is taxable.
If the entire amount is not
claimed then the tax exemption can be claimed only for the amount for which the
bills are presented. The remaining amount remains taxable. For example, if
bills are submitted for Rs.8,000 then the tax exemption will be provided for
Rs.8,000. The remaining Rs. 7,000 will be taxable according to the appropriate
tax bracket.
How to Claim Medical Reimbursement
Medical reimbursements can be
claimed in two scenarios. The first is when the employer provides for medical
reimbursements and the other is when they don’t.
Reimbursements via employers:
In case the employers have provided
for medical reimbursements then employees can submit the bills for the medical
expenses and claim the benefits. These bills can be submitted quarterly,
half-yearly or annually.
Many of the employers pay the
medical allowance of Rs. 15,000 as a part of the monthly salary in amounts
ranging up to Rs. 1,250 or once a year as a lump sum. In such cases employees
just need to submit the bills to the employers.
There may also be situations
where employers will take a declaration from the employee about expenses
incurred. In this case, no bills need to be submitted however, it would be
prudent to preserve all bills since they may be required for scrutiny by the
Income Tax department.
Medical allowance when employers don’t provide reimbursements:
If employers are not providing
their employees with medical reimbursements, bills can still be submitted for
consideration for tax exemption under section 80D. The limit for this too is
Rs. 15,000 however the reimbursement may be granted only for pre-defined
ailments.
Benefits
of Medical Reimbursements
There are two main benefits to
medical reimbursements. The first is that it helps reduce the taxable income of
the employee and the second is that it offers tax benefits on medical expenses.
However, the only negative to this scheme is that in order to avail the tax
benefits, medical bills worth Rs. 15,000 need to be submitted. With such a
submission no tax benefits can be availed.