Is the Medical Reimbursement of Rs. 4.50 Lac from the Employer Taxable? How to Save Tax on It

With the ongoing debate surrounding the taxability of medical reimbursements, the confusion around tax exemptions can be quite complex. As of an amendment in the Budget 2018, the tax exemption on medical reimbursements has been reduced to a limit of Rs. 15,000 only, sharply bringing into question the tax implications for amounts over this threshold.

Understanding the Current Law

According to the updated Income Tax Act, employers are allowed to provide medical reimbursements up to Rs. 15,000, which are exempt from taxation. This means that if an employer provides a medical reimbursement of Rs. 4.50 lakh (450,000), the amount exceeding Rs. 15,000 would be taxable.

Let's break it down:

Total Medical Reimbursement: Rs. 4.50 lakh (450,000) Tax Exemption Limit: Rs. 15,000 Taxable Amount: Rs. 435,000 (450,000 - 15,000)

What Constitutes a Reimbursement?

A common misunderstanding arises when distinguishing between a reimbursement and an allowance. A reimbursement is meant to cover a specific expense, whereas an allowance is a payment provided by the employer as a benefit that doesn’t necessarily cover a specific expense. In the case of medical reimbursements, the money is meant to cover out-of-pocket medical expenses and thus should not be considered taxable.

The Role of Income

The crux of the matter is the source of the funds used for the medical expenses. If the funds used for medical reimbursements come from income that has already been taxed, then the reimbursement itself should not be taxable. This is because the income that funded the medical expenses has already been subjected to tax, and the reimbursement simply reimburses the individual for the expenses incurred.

However, the tax department has not explicitly clarified when reimbursement is deemed to be a specific expense and not a general allowance. Therefore, it is advisable to seek further guidance from your employer's finance department or consult with a Chartered Accountant (CA) to fully understand the tax implications.

Tax-saving Strategies

While the medical reimbursement above the tax exemption limit of Rs. 15,000 is taxable, there are ways to mitigate the tax burden. Here are a few tax-saving strategies:

Claim Medical Expenses: If the medical expenses exceed the Rs. 15,000 limit, claim them as a tax deduction. The medical deduction can cover a range of health and medical expenses, so make sure to note everything you would be eligible for. Prescription Backlog: If you have a backlog of medical expenses not yet paid, keep these on hand as you may be able to claim them later.
Health Insurance: Consider investing in a health insurance plan that covers a wide range of medical expenses. Some health insurance policies also cover emergency medical expenses, which can be eligible for tax deductions. Employee Stock Option Plans (ESOPs): If your employer offers an ESOP scheme, consider using your stock options to cover medical expenses. This can offset the taxable income generated from your job.

Conclusion

The taxability of medical reimbursements can be a confusing topic, especially when the limits and allowances are not clearly defined. Employers providing medical reimbursements above the Rs. 15,000 limit should be aware that only the excess amount is taxable. Seeking guidance from your finance department or a Chartered Accountant is crucial to ensure that you are compliant with tax regulations and to maximize any tax savings opportunities.