Medical Allowance: Applicability, Types, Exemptions Limits & Calculation

The Indian government allows employees to include medical allowance in their salary packages to help cover medical expenses. In November 2022, Indian households are estimated to have spent INR 120 billion on health and healthcare services and products. This blog will discuss medical allowances, how to calculate them in a salary, and the different types of exemptions.

Medical allowances have become one of the most popular features of employment packages, helping employees with their health needs.

What Are Medical Allowances?

Medical allowances are pre-determined sums of money that employers use to keep up with their employees’ growing needs concerning medical expenses. These allowances are supposed to cater to medical expenses that the employee may have to pay within the period of employment. They differ from medical reimbursements, where the employees must corroborate costs they had to make because they are paid regardless of medical expenses.

Types of Medical Allowances

Fixed Allowance

As the name implies, this is a fixed amount paid to the employee every month without regard to such expenditure. It is quite a prompt and direct way of delivering medical support to the employees.

Reimbursable Allowance

Here, employees have to produce receipts or bills to prove that they incurred the costs as provided by the Allowance policy. This type is again more prevalent in organizations that want to ensure that the allowance is spent strictly on medical errands.

Health Insurance Premium Allowance

Some employers leave a provision that pays all or part of the cost of health insurance. Such an allowance is particularly advantageous because it serves as insurance coverage and a source of pocket allowance.

Special Allowance

This type of allowance may be given for certain activities requiring medical attention, such as maternity, chronic disease treatment, or any other ailment from which the employee may suffer. It is usually in addition to the standard allowance.

How to Calculate Medical Allowance in Salary

Determining the possibility and amount of allowance in a given salary package is easy; nonetheless, the format and the employer’s existing policies determine this factor. Most often, the allowance is one of the constant salary elements.

For instance, an employee earns a gross salary of ₹50,000 per month. In the case of ₹ 1,500 for the medical allowance, then it would be ₹ 51,500, including the allowance for the month. The allowance is usually non-taxable up to a specific limit, which brings us to the next important point: exemption.

Exemption and Tax Implications

Understanding the tax law’s implications for medical benefits is paramount for both the employer and the employee. Exemption under which section of the Income Tax Act is often a point of confusion.

As per the law in Section -10 under the IT Act, any amount spent on medical treatment, whether for oneself or a dependent family member, up to the limit of fifteen thousand rupees per year, is allowed as a deduction.

However, such allowances fall under this category and are not entitled to this exemption. Exemption is allowed only if the allowance is given to the employee to meet actual extensible medical expenses.

For instance, an employee may get ₹1,500 per month or ₹18,000 per year of allowance, which is fully taxable but exempt to the extent that the employee incurs a reimbursement of ₹15,000 of medical bills. The rest, ₹3,000, would hence be liable to tax.

The Difference Between Medical Reimbursement And Allowances

Another point that must be clarified is the difference between medical allowances and reimbursements. Though both involve medical expenses, they operate in different ways. An allowance is a negotiated amount given regardless of the employee’s spending on medical bills. In contrast, a medical reimbursement plan entails the employee presenting bill statements to be reimbursed for any amount spent.

Therefore, employers must ensure that the differences are well explained to the employees and that the employees fully maximize their benefits.

Health Insurance and Allowances

Health insurance is another form of medical care generally comprising employees’ benefits. However, whereas allowances are in direct cash, health insurance is a guaranteed means to cater to substantial medical expenses, more often than not, much more than the allowance. Some employers provide both, considering the medical allowance is for minor expenses, while health insurance is for handling significant costs.

Employers may also offer a lunch allowance, which is very helpful as premiums for health coverage can be very expensive. Apart from helping the monetary status of the workers, it also serves to create a healthier population since employees can attend to their medical needs.

The Role of Fixed Medical Allowance in Employee Compensation

A fixed medical allowance is one more regular constituent of the salary structure. Employers can realize it is a convenient method of assisting employees with their healthcare expenses without worrying about compiling a reimbursement plan. Nonetheless, because the amount is fixed and could be fully taxable, employers and employees must be clear about the tax consequences and the limitations on deductions.

Employers might consider combining a fixed and reimbursable allowance to maximize the distinct advantages of these plans for employees and minimize the administrative burden. This means that while the employees receive fixed monthly support, they also have the opportunity to recover actual medical expenses through tax exemptions.

Conclusion

Health expenses are a significant compensation component, and the funds can be used to cover all types of medical expenses. It is equally essential for employers and employees to know how to calculate medical allowances in their salaries, the various types, and the basis for exemption.

Employers should be advised on how to organize pay for medical expenses better to maximize employee benefits while considering tax laws.

Whether the provided amount is a fixed allowance, reimbursable allowance, or health insurance premiums, it should sufficiently address the employees’ health needs. In so doing, employers meet some of their employees’ welfare needs and create happier and, hence, more productive employees.

Therefore, it became essential to investigate the nature of allowances provided in different organizations and how they are treated for tax so employers and employees can make appropriate decisions.

FAQs

1. What Is a Medical Allowance?

Such allowances are prescribed amounts of money employers grant employees as part of their remuneration. They are also meant to supplement costs the employee might meet during their service contract. This differs from reimbursements, where one must submit proof of expenditure to be paid back. It is paid even if the employee never spent any dime on bills.

2. What Is the Eligibility to Claim Allowance?

Specific general requirements often determine the possibility of a worker’s claim. Generally, any employee is entitled to the allowance in the employer’s clear compensation package.

However, depending on the company’s reimbursement policy, to support this allowance for tax exemptions, the employee may be required to provide actual expenses for medical attention passed through the company health plan and identified under the plan or detailed bills, which would make up the allowed amount of money.

3. Is a Medical Allowance Taxable?

Yes, an allowance is usually deductible from the employee’s gross income and, hence, is taxable. But if the allowance is reimbursed only for specific bills that have been incurred, then such allowance is fully tax exempted up to ₹15000 per annum as per the Income Tax Act.

You should consult your employer regarding whether there are degrees in the tax allowance and whether you can claim an allowance under your company’s policy.

4. How Can I Utilize My Medical Allowance Effectively?

To understand how to use your company’s allowance, you must manage your expenses properly and learn how your company operates its reimbursement system.

If the allowance has provided a reimbursement choice, ensure you can present actual expenses to claim for tax exemptions. Also, it is helpful to know what is allowed to be claimed for allowance and to distinguish between fixed allowance and reimbursements.

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