Income Tax Medical Bills Exemption under Section 17(2)

The Income Tax Act of India was established in India in the year 1961 as the guiding principle for imposing and collecting income tax from the citizens of India. Among the income taxes defined are exemptions that can be used to reduce the taxable income for a person.

One such exemption is medical allowance. It is an allowance that is provided for under section 17(2) of the IT Act and states that an employee can submit bills to the employers for medical treatment undertaken by them of their family members.

Once the bills are submitted, employers can reimburse an amount up to Rs.15,000 as per the rules. According to the IT Act, reimbursements of medical allowances up to Rs.15,000 will not be considered as taxable income.

The key thing to remember is that medical allowances and reimbursements should not be confused with medical insurance, which is a completely different product.

Terms Used in Relation To Medical Allowances:

There may be terms used in relation to medical allowances and reimbursements that may tend to confuse people so let’s first take a look at the terms and try to define them in the simplest way possible.

Medical Allowance:

The medical allowance is just an amount that is defined by the government. The purpose of this amount is to provide employees with tax benefits in case they have had to spend on medical procedures in the year. It can be claimed for treatment undertaken by an employee or their families. Medical allowance is taxable.

Medical Reimbursement:

Medical reimbursements are the actual amount that the employer’s gives to an employee when they submit bills for medical treatment availed. Medical reimbursements are exempt from taxes till the limit defined by the IT Act, which is Rs. 15,000.

Family:

For the purpose of medical reimbursements a family is defined as the spouse and children of the employee. The employee’s parents and siblings of the employee can also be considered for such benefits but the condition is that they need to be completely dependent on the employee.

Medical Allowance and Income Tax

Medical allowance for reimbursements comes with a limit of Rs.15,000 per annum. This allowance can be claimed when an employee, or the family of said employee, actually undergoes medical treatment. Once the claim is submitted it turns from an allowance to a reimbursement.

Many employers pay their employees a fixed amount, in their monthly salary, as medical allowance. This payment can be of Rs. 1,250 a month or Rs.15,000 a year. If the employee incurs medical expenses then the amount up to Rs.15,000 is exempt from taxes. Any amount exceeding the medical allowance is not exempt from tax and can be taxed at the appropriate rate according to the employee’s tax bracket.

As far as taxation is concerned, it must be remembered that the allowance is taxable but the reimbursements or claims are not; up to Rs. 15,000. If no bills are submitted for reimbursement or claims then a tax of 30% of the 15,000 is taxable.

If the entire amount is not claimed then the tax exemption can be claimed only for the amount for which the bills are presented. The remaining amount remains taxable. For example, if bills are submitted for Rs.8,000 then the tax exemption will be provided for Rs.8,000. The remaining Rs. 7,000 will be taxable according to the appropriate tax bracket.

How to Claim Medical Reimbursement

Medical reimbursements can be claimed in two scenarios. The first is when the employer provides for medical reimbursements and the other is when they don’t.

Reimbursements via employers:

In case the employers have provided for medical reimbursements then employees can submit the bills for the medical expenses and claim the benefits. These bills can be submitted quarterly, half-yearly or annually.

Many of the employers pay the medical allowance of Rs. 15,000 as a part of the monthly salary in amounts ranging up to Rs. 1,250 or once a year as a lump sum. In such cases employees just need to submit the bills to the employers.

There may also be situations where employers will take a declaration from the employee about expenses incurred. In this case, no bills need to be submitted however, it would be prudent to preserve all bills since they may be required for scrutiny by the Income Tax department.

Medical allowance when employers don’t provide reimbursements:

If employers are not providing their employees with medical reimbursements, bills can still be submitted for consideration for tax exemption under section 80D. The limit for this too is Rs. 15,000 however the reimbursement may be granted only for pre-defined ailments.

Example:

Suppose Ravi works for a company where his salary slip looks like the table below. He is paid a sum of Rs. 1,250 every month as medical allowance and it is mentioned in his payslip under MEDICAL.

He falls ill for a few weeks and is found to be suffering from Jaundice. He goes to the hospital for treatment and the whole treatment, the doctor’s visit, the tests and the medicines cost him Rs. 5,000. He retains all the bills relevant to his treatment and when he gets back to work he submits them to his company.

In this case, since the medical allowance is already paid to him as a part of the salary, he will not have to claim the amount. He will instead get tax benefits for the Rs. 5,000 spent on the treatment.

If he submits no other bills then the remaining Rs. 10,000 of the medical allowance will be liable for tax.

Benefits of Medical Reimbursements

There are two main benefits to medical reimbursements. The first is that it helps reduce the taxable income of the employee and the second is that it offers tax benefits on medical expenses. However, the only negative to this scheme is that in order to avail the tax benefits, medical bills worth Rs. 15,000 need to be submitted. With such a submission no tax benefits can be availed.

Medical Allowance Vs Medical Reimbursement

It must be remembered that there is a difference between medical allowance and medical reimbursements. The following table will help highlight some of these differences.