Medical allowance vs medical reimbursement

Any perquisite such as medical allowance is taxable, while reimbursement by an employer of medical expenses incurred by an employee is generally tax-free

Many people often use the words “medical reimbursement” and “medical allowance” interchangeably. They think both the words have same meaning. But they are different terms that offer different tax treatment under the Income-Tax Act, 1961.

Medical allowance

According to I-T Act, any allowance received by an employee is fully taxable unless specifically exempted. Thus, allowance per se is taxable in all cases, except those specifically exempted. For instance: HRA (house rent allowance) is exempt up to the extent specified in Section 10(13A). Monthly allowance is not specifically exempted so it is added to the salary as a perquisite and fully taxable.

‘Medical allowance’ is a fixed allowance paid every month to employees irrespective of the fact whether they submit the supporting bills or not. ‘Medical reimbursement’ is a payment made to employees against medical bills produced by them subject to their entitlement. The maximum tax benefit available is Rs. 15,000 per annum. Under this head, one may avail for reduction in the taxable income for a maximum of or up to Rs. 15,000 for medical expenses during each financial year.

Medical reimbursement

Reimbursement by an employer of medical expenses incurred by an employee is generally tax-free. Where an employee is allowed to get reimbursement for the medical expenses incurred by him or his family members, the entire amount of reimbursement is tax-free and is not treated as a taxable perquisite. For medical reimbursement, Rs 15,000 is the maximum tax break that an individual can avail of against original bills. This exemption is given to the employee only if the medical expense is actually incurred on his medical treatment or his family members—who are dependent on him. Family members include spouse, children, parents, brother or sister of the employee.

If person is not providing medical bills and are taking medical allowance, the entire amount would be taxable. After verification of bills employer reimburses employee, subject to pre-decided limits. Medical reimbursement up to Rs. 15,000 p.a. is exempt from Income Tax.

Medical reimbursement comes under Section 80D, where the maximum limit is Rs. 15,000 per annum. These bills usually have to be submitted on or before January 30 to your office. If you had not paid the bill then 30% of Rs. 15,000 will be considered as a taxable amount. But while you are filing the tax return, that time you can show the bills as an exception and claim the 30%.

Remember, it is the employer’s responsibility to pay medical reimbursement only against authentic bills to claim exemption from Income Tax. This reimbursement is open to audit and scrutiny by both tax auditors and I-T Department.

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