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A salary or a paycheck is the remuneration we get in return for the services we provide at our workplace. Months usually end with us craving for our salary and us praying for it to come as soon as possible. Some of you get this bundle of joy on the 1st, some on the 10th and others, well any day in the month as per your firm’s policies. However, as soon as it lands into your bank account, you see it depleting as days or even as hours go by. Income tax is one of the first thing that gets cut from our salary followed by a tragic list of unavoidable devils. Household bills, fees, EMIs, insurance premiums and other expenses erode your salary faster than you expect. And if you have a family to support, then the expenses just go on and on from the kids' school fees to their piano classes and German tuition expenses. Such is an adult’s life.
But, did you know that your entire salary is not taxable? A salary structure is carefully strategised to benefit both, the employer and the employee. The single figure which is your salary consists of many other things. A lot of us till date may still be unaware of these. So, let us throw some light onto these components.
Basic Salary: Your fixed base income comprising of perhaps 30% - 50% of your total salary. This base salary differs with each position at the firm and is calculated based on your skills, expertise, and qualification.
Employee Provident Fund: This is an investment made by both, the employee and the employer every month which is beneficial to the employee upon retirement or termination of employment.
Insurance: Many firms offer health or life insurance services as added amenities to their employee. An insurance policy needs a premium to be paid periodically which is included as part of the total salary they provide.
Reimbursements: An employee is entitled to a variety of reimbursements which is provided upon submission of respective bills. These bills are then verified by the firm and then granted a reimbursement if they are proven legitimate. These reimbursements come as a relief to a normal salaried individual. Types of reimbursements include phone bills, medical bills, etc.
Allowances: Several types of allowances can be availed by an employee such as house rent allowance, leave travel allowance, conveyance allowance, dearness allowance, and medical allowance. Let us take a closer look at medical allowances and reimbursements.
Medical allowances and reimbursements are particularly important because health always comes first.
In this day and age of unhealthy lifestyles engulfing the world, medical emergencies may pop up at any day and anytime. Most of the times, they hit you when you least expect it. With technology doing most of our work and taking up most of our time, lack of exercise has become common today. We would rather take an elevator than walk up the stairs. Those pizzas for lunch and burgers for dinner sure do lure quite a number of people even while they are fully aware of the consequences on their health. Yet, we choose to ignore all that for the momentary joy which is what leads to us developing medical conditions. And, when these conditions arise, we cannot ignore them. The result? A huge hole in our salaried pockets.
These allowances and reimbursements become a cushion for you against any expected and unexpected medical expenses that the universe decides to throw at you. They relieve you off the burden of medical bills piling up.
As stated above, an employee receives this allowance as part of his/her total salary. This allowance is offered to the employee every month, whether the employee submits medical bills or not. In other words, a medical allowance is paid to the employee, regardless of whether he/she really undergoes a medical treatment or whether he/she shows bills to substantiate the expenditure. A medical allowance is usually fixed. As per government policies, this allowance is mandatory in the public sector, unlike the private sector.
These two terms are often confused with one another, but they are miles apart. So, let us now talk about how different they are. As mentioned, a medical allowance is a fixed allowance paid by the employer to the employee regardless of whether he/she avails the medical treatment and presents bills to show the expenditure or not. Now, a medical reimbursement occurs when the employer reimburses the amount actually incurred by the employee. This usually happens after the employee submits supporting bills which is then verified by the employer to check whether the bills are legitimate.
Clause (v) of the Proviso to Section 17 (2) of the Income Tax 1961 allows a tax exemption of up to Rs. 15,000 on such medical reimbursements. Thus, the maximum benefit allowed is capped at Rs. 15,000 per annum. If an employee is provided an allowance instead of reimbursement for medical treatment abroad, it will be considered as part of the taxable component of the salary of the employee.
No tax is imposed on medical reimbursement up to the specified amount of Rs. 15,000.
This amount of Rs. 15,000 is the maximum exemption one can avail in a given financial year.
The type of medical treatment taken by the employee does not determine whether a tax exemption can be availed or not.
Medical reimbursement is not taxable if the treatment is done in any of the four following scenarios.
Treatment is done in a hospital maintained by Central/State Government or Local Authorities.
Treatment is done in a hospital maintained by the employer.
Treatment is done in a hospital approved by the Government.
Treatment is done in a hospital approved by the Chief Commissioner of Income Tax.
As per clause (VI) of Section 17 (2) of the IT Act, 1961, medical expenditure incurred by an employee or any of his family member outside India is fully tax exempt.
Let us now look at a simple example which explains everything we have mentioned so far.
Mrs. Banerjee works at a consultancy firm which offers her a medical reimbursement to the tune of Rs. 45,000. On her way to work one fine morning, she gets into a small bike accident and is taken to the hospital immediately. Her doctor explains that she has a fractured ankle but will be fine very soon. After she gets better and resumes her work, she submits her medical bills of her ankle treatment which cost Rs. 45,000 in total.
However, we have already established the fact that the maximum tax benefit Mrs. Banerjee could possibly avail from this treatment is Rs. 15,000, which she eventually does, although the total reimbursement was of Rs. 45,000.
The Union Budget of 2018 brought a huge relief to salaried taxpayers as Mr. Arun Jaitley, the Finance Minister proposed a standard deduction to the tune of Rs. 40,000 in place of the current exemption with respect to both, medical reimbursement and transport allowance. The current scenario comprised of tax benefits relating to medical reimbursements is up to Rs. 15,000 and travel allowances is up to Rs. 19,200 per annum. Thus, the proposed standard deduction exceeds to current deduction. This change will prove to be beneficial for pensioners as they did not get the privilege of availing a deduction as opposed to salaried individuals. This policy change has resulted in the government letting go of Rs. 8000 Crore of revenue.
Furthermore, the Budget has also proposed to increase the deduction from Rs. 30,000 to Rs. 50,000 for health insurance premiums under Section 80D of the Income Tax Act. This also comes as a big comfort to the citizens. And, for senior citizens suffering from critical illnesses, the deduction will now be a whopping Rs.1 lakh.
A staggering number of 2.5 crore people comprising of salaried employees and pensioners will be enjoy the benefits of the new standard deduction launched in the Union Budget of 2018.
What is a medical allowance?
A fixed type of allowance paid by an employer to an employee as part of his/her total annual salary regardless of whether medical treatment is availed or not, is called medical allowance.
What is a medical reimbursement?
A reimbursement is provided by the employer to the employee for actually incurring medical expenditure and providing medical bills as proof is known as medical reimbursement.
How much tax benefit is one eligible for with respect to medical reimbursements?
The maximum limit of tax benefit with respect to medical reimbursement is Rs. 15,000 per annum.
Can one claim medical expenses from the previous years?
No. An employee can only claim reimbursements from his/her employer relating to the current financial year.
Can expenditure related to medical insurance be considered in the reimbursements?
No. A premium paid against a medical insurance is not considered as a medical expenditure and thus, cannot be considered as a tax benefit.