What is Medical Allowance in Salary?

Employers offer many health and related benefits to their employees to cover expenses incurred on them, their parents, children or dependent brothers or sisters. These benefits include medical allowance and reimbursement, among others.

Subsequently, individuals can also avail medical allowance exemption under the Income Tax Act. With these health benefits, salaried individuals can easily manage medical expenditures incurred in any financial year.

Read on to know more about medical allowances in salary!

What Are Medical Allowances?

A medical allowance is a fixed allowance that a company pays its employees, regardless of whether they have submitted the bills to claim these expenses or not. Employers offer these allowances every month. Employers provide this benefit to promote staff health and support medical expenses that workers incur in a financial year.

Additionally, employers provide other medical benefits, namely medical reimbursement. It is crucial to understand how this particular benefit differs from medical allowance, which is further discussed in detail below.

What Is the Difference Between Medical Allowance and Medical Reimbursement?

Often salaried individuals use the terms of medical allowances and medical reimbursement alternatively. However, the primary difference lies in the tax treatments as per the Income Tax Act 1961.

As stated earlier, a medical allowance is a fixed payment that employers provide to employees to cover their medical expenses. On the other hand, medical reimbursement is a tax-free component where employers reimburse employees' portion of medical costs.

Under section 80D, you can claim medical reimbursement up to ₹15,000 p.a. Here, you have to submit the bills on time to get medical reimbursement. Otherwise, 30% of ₹15,000 will be considered taxable. However, if you file tax returns, you can reclaim 30% of the amount. Employers are liable to pay medical reimbursement once employees have submitted bills. However, if employers do not deduct taxes on the amount (in case bills are not submitted), it can lead to TDS-related penalties.

Now that individuals know what medical allowance is and how it is different from medical reimbursement, let’s move on to the categories of medical allowance.

Types of Medical Allowances

Depending on the nature and company policy, medical allowances fall under 3 categories. These are -

1. Fixed Medical Allowance

As the name suggests, fixed medical allowance refers to a fixed amount that employers pay to employees. This amount is a part of the employee’s salary and is taxable irrespective of whether it is spent on medical costs or not.

For instance, if an individual's salary consists of a medical allowance worth ₹5000, they have to pay tax if his/her total income falls under taxable income for that financial year.

2. Mediclaim Policy- Health Insurance

Usually, employers offer a mediclaim policy for the employee only. Therefore, employers can claim this amount in their corporate return.

3. Medical Reimbursement

Here, employees have to submit medical bills, including the cost of medicines. Then, employers reimburse claims after verifying those bills on an actual basis.

For instance, if an individual submits bills of medical expenses worth ₹40,000, the employer reimburses ₹40,000 in full as per the company policy. However, note that ₹15,000 will be deducted as medical reimbursement out of ₹40,000 from their taxable income.

Latest Update on Medical Reimbursement

The standard deduction under the Income Tax Act was reintroduced in the budget for the financial year 2018-19 by the Finance Ministry of India.

It was reintroduced after removing the medical reimbursement of ₹15,000 and travel allowance of ₹19,200. However, the medical allowance is part of the standard deduction now and is raised from initial ₹40,000 to Rs.50,000 p.a., effective from 2019.

Standard deduction refers to a flat deduction which is deducted from the gross salary. The amount of money deducted from the gross salary is not subject to tax hence can be used to lower the taxable income and reduce the total tax outgo.

Salaried individuals irrespective of income category and pensioners can get full rebate of the tax.

Note: Taxpayers following the new tax regime cannot claim the standard deduction under Section 80TTA/80TTB.

What Is the Eligibility Criteria to Claim Medical Allowance?

As per the Income Tax Act 1961, the calculation of medical allowance expenditure is not present and entirely depends on the employee. Therefore, to receive a medical allowance exemption, individuals have to fulfil certain eligibility criteria. These are as follows -

Employees must spend the claimed amount monthly by paying medical expenses incurred on self, spouse, children, dependents, parents, etc.
These amounts need to be covered as medical entitlements so that employers can reimburse them.
The reimbursed amount must not reach beyond ₹15,000 in any financial year.

Wondering what maximum amount is that one can claim after one fulfils the above-mentioned eligibility criteria? Read along!

With the sum paid by employers towards the treatment cost of an employee and his/her family (spouse, children, siblings, dependent parents), that employee can claim income tax deductions up to ₹15,000 in a financial year.

How to Calculate Medical Allowance in Salary Slip?

You can refer to the table below to understand medical allowance exemption as well as calculation.

Case 1

Bills Submitted	Exempt Amount
₹14000	₹14000 under section 10 of the Income Tax Act

Case 2

Bills Submitted	Exempt Amount
₹30000	₹15000 (only ₹15000 can be claimed for tax exemption)

What Is the Procedure to Claim Medical Allowance?

To claim medical allowance or medical reimbursement, one has to submit the original bills of medical expenses to employers. Then, after checking those bills, the employer will reimburse the amount with a maximum limit of ₹15000 without tax deduction.

Hopefully, the above discourse has helped you understand how medical allowance exemption is different from reimbursement. With these details and other information, individuals can claim tax benefits on their own and their families' medical expenses.

Frequently Asked Questions

✓ Can I raise a claim for medical expenditure for the previous year?

No, you cannot claim medical expenditure for the previous year.

✓ What is the medical allowance for pensioners?

As per the amendment in the Income Tax Act 1961 (through Finance Act 2018), pensioners can claim tax deductions of ₹40000 as standard deduction.