In recent years, the number of health issues has increased manifold. This is an international occurrence, and public health experts believe that poor dietary choices and sedentary habits are the two primary culprits for what is collectively known as ‘lifestyle diseases’. The increase in the prevalence of these diseases has been tail-ended by a rise in medical expenses.
This is where the concept of medical allowance comes into the picture. Simply put, it is a fixed amount paid by organisations as an allowance to employees for their welfare. This allowance is paid regardless of actual incidents of illness, i.e. recipients do not need to show that they had been ill in a fixed period.
An Elaboration of Medical Allowance
Studies show that Indians pay more than 70% of all medical expenses incurred from their own pockets. Since this amount is increasing with each passing year, the pressure on employees is severe. Hence, many organisations increase the medical allowance paid from time to time.
This allowance is fully taxable. Under the provisions of the Income Tax Act of 1961, no amount disbursed as the medical allowance is exempt from tax.
This welfare measure has recently witnessed a change of rules governing it. In the annual budget presented in 2018, the provision of ‘standard deduction’ was reintroduced. Effective FY 2019-2020, the medical allowance does not exist as a stand-alone measure; it has been subsumed by the standard deduction, and the maximum benefit an individual can claim under the new norms is Rs. 50, 000 each year.
Reimbursements for Medical Expenditure
There is considerable confusion among many employees between the terms ‘medical allowance’ and ‘medical reimbursements’. Medical reimbursement rules are different. An organisation may choose to either pay a fixed allowance per month or repay a salaried employee for costs incurred on medical grounds upon presenting documented proof of hospitalisation, surgeries, outdoor visits and so on.
The second scenario is known as medical reimbursement. Unlike allowance, medical reimbursements are exempt from tax to a certain extent. Currently, reimbursements up to Rs. 15,000 each year is exempt from taxation.
To claim this exemption, all employees must submit document proof for their medical expenditure. Some other rules that must be met to claim medical reimbursement taxable exemption are the following:
- Any employee can not only claim reimbursements for self, but also for his/her spouse, dependent parents, siblings and children. Note that any medical allowance for siblings or dependents is payable only when they do not have any other pre-existing medical cover and are fully dependent on the employee.
- Medical bills and related documentation can cover every aspect of an illness. Hospitalisation, surgical procedures, any medicine bought from retailers and every other expenditure for post-hospitalisation care can be part of reimbursement claims. This is covered under Section 17 (2), Clause (b) of the IT Act, 1961.
- All aspects of medical reimbursements are governed by Section 80D of the IT Act of 1961. The employee needs to submit all documents only to the employer. If there is a delay on the employee’s part in submitting the necessary documents, 30% of the Rs. 15,000 exemption can be liable for taxation. However, the employee can reclaim this 30% when he or she is filing tax returns.
- Under Section 80D, medical allowance exemption each year is capped as standard deduction to a maximum of Rs. 40,000. Besides hospitalisation and other related heads, this exemption covers travelling expenses too. Starting from 2018-2019, this standard deduction was brought back. To claim this amount, it is not mandatory to submit all medical documents to an employer.
Claiming Tax Deductions on Medical Expenses
Given the increasing cost of medical care in India, it is imperative that all salaried individuals remain aware of avenues to enjoy tax relief. For example, Section 80D has provisions to seek exemptions on medical insurance. If employees take out insurance for themselves, their spouse and children, they can claim a deduction of Rs. 25,000 per year.
Additionally, if insurance is taken out for dependent parents, a further exemption of Rs. 25,000 can be claimed in a year. These advantages apply to all insurance policies granted by IRDA-recognised insurance companies only. If assessees are senior citizens, the employee can claim exemptions of up to Rs. 50,000 each year.
The latter limit was set in the budget presented in 2018 and is applicable from FY2018-19 onwards.
Section 80DDB contains further provisions for tax exemptions depending on age. Senior citizens of up to 80 years can apply for exemptions of up to Rs. 75,000 each year. Any assessee who is older than 80, automatically falls under the ‘super senior’ citizen bracket and can claim up to Rs. 1 Lakh on exemptions every year.
Procedure for Claiming Exemptions
Experts advise that it is a good idea to not opt for a fixed medical allowance. Instead, opting for reimbursements has far more value. To claim tax exemptions, an employee needs to submit a medical certificate obtained from a registered medical practitioner under Section 80DDA.
Several medical conditions are covered under the Act. They range from neurological conditions like Parkinson’s and Ataxia, chronic ailments including malignancies and haematological conditions like haemophilia. Both AIDS and Thalassemia are covered under Section 80DDB.
Finally, there are special provisions for medical allowance for pensioners. The amended Finance Act 2018 allows all pensioners to claim Rs. 40,000 each year as standard deduction. It must be noted that if an individual receives more than one pension, the exemption can be sought only for a single pension and not for multiple ones.
As a simple example, if an individual receives a civil and a military pension and avails the health infrastructure of either entity, there is no scope for any medical allowance under current laws. However, if the same individual does not avail the medical infrastructure from either civilian or military facilities, the allowance can be enjoyed for either facility.
The Central Government is planning to subsume several other tax laws and simplify the existing regime. In that light, standard deduction may witness upward changes and provide relief to a massive portion of the population.