Difference between Medical Allowance and Medical Reimbursement
Both Medical Reimbursement and Medical Allowance looks same if one does go only by name, but they are two different things having different tax treatment under the Income Tax Act, 1961. The later is fully taxable with the first one is exempt upto a certain limit. Let’s understand in more details.
As a general principle under the Income Tax Act, any Allowance received by an employee is fully taxable unless specifically exempted for example House Rent Allowance is exempt only 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. In case employee receives a fixed monthly allowance for the discharge of medical expenses than it shall be treated as a taxable perquisite added to the salary. Hence, an employee should avoid the receipt of an allowance for medical expenses.
Reimbursement of medical expenses actually incurred by an employee for his medical treatment or the treatment of any member of his family upto Rs. 15,000 per annum is exempted and shall not be treated as a taxable perquisite as per Clause (v) of the Proviso to Section 17 (2) of the Income Tax Act. Member of Family includes Spouse or Children of the Individual or any of dependent relatives being Parents, Brother or Sister. The condition of dependency does not applicable for Spouse or Children but Parents, Brother or Sister should be dependent on the individual. Thus Medical Expenses Reimbursement of expense actually incurred by an employee upto Rs. 15,000 per year is completely tax free.
In case of Medical Reimbursement, employee is required to submit the cash memos, bills to employer to claim the reimbursement. After verification of bills employer reimburses employee, subject to pre-decided limits. Medical Reimbursement up to Rs. 15000 p.a. is exempt from Income Tax.
Please note that, it is employer’s responsibility to pay Medical Reimbursement only against authentic bills, cash memos to claim exemption from Income Tax. This reimbursement is open to audit and scrutiny by both Tax Auditors and IT Dept.
Typically if the employee fails to submit valid medical bills or cash memos for the entire entitlement amount of Rs. 15,000 then the balance amount (Rs.15000 less submitted bills or cash memos amount) paid by the company shall become taxable amount. For example an employee is entitled to Medical Expenses Reimbursement of Rs. 15,000 every year, but is able submit medical bills only for Rs. 10,000 for the year. In this case the company would pay Rs. 10,000 as Medical Expenses Reimbursement, which is not taxable. The balance amount of Rs. 5,000 would be paid in the last month and would be taxable.
Please note that Medical Expense Reimbursement of Rs. 15,000 is over and above the deduction under under Section 80D of the Income Tax Act available for Medical / Health Insurance Premium – Mediclaim Premium.
So Instead of fixed Medical Allowance, always opt for reimbursement of Medical Expenses.