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Medical allowance - Calculation, reimbursement, and tax rules
Medical allowance is a fixed amount provided to employees each month to help cover medical expenses for themselves or their family members.
This allowance plays a significant role in providing employees with financial support for their healthcare expenses. For employers, understanding the purpose and calculation of medical allowance is key to developing a well-rounded salary structure and ensuring employees are supported when they need it most.
What is a medical allowance?
Medical allowance is a monthly fixed amount included in an employee’s salary to help cover medical expenses for themselves or their family members. This allowance is typically calculated as a predefined amount like ₹5,000, ₹10,000, or any other amount, depending on the company's policies.
According to reports, Indians living in tier 2 and tier 3 cities fund approximately 15% to 20% of their medical expenses out of pocket. As these expenses rise each year, this puts significant financial pressure on employees. It's important for employers to not only offer medical allowances but also to review and increase them regularly to reduce this burden.
Types of medical allowance
Depending on the company's policies, there are three main types of medical allowances that you can offer as part of your employee’s CTC:
Medical reimbursement
Medical reimbursement is an arrangement where employers reimburse employees for their medical expenses. Employees must submit valid medical bills and receipts to claim this reimbursement.
- How it works: An employee incurs medical expenses and submits the bills to the employer. The employer verifies the documents and reimburses such expenses subject to a certain limit.
- Tax benefits: The amount received as medical reimbursement is included in the employee’s taxable income and is fully taxable based on the applicable tax rates.
Before 2018, medical reimbursements of up to ₹15,000 per year were tax-free. However, with the introduction of the standard deduction in the new tax regime, this exemption was removed. - Flexibility: Typically, employees are allowed to claim reimbursement for a wide range of expenses, including doctor consultations, medicines, tests, and treatments.
For example, if your company provides an annual medical allowance of ₹50,000, and an employee incurs ₹25,000 in personal medical expenses and ₹25,000 for their spouse, they can submit medical bills to claim reimbursement.
Fixed medical allowance
A fixed medical allowance is a set amount paid by the employer to the employee as part of their salary. Unlike medical reimbursement, employees receive this allowance regardless of whether they incur medical expenses.
- How it works: The allowance is paid monthly as a fixed sum specified in the employee's salary package. Employees do not need to submit bills to receive this amount.
- Taxation: The fixed medical allowance is also fully taxable under Indian income tax laws and it is considered part of the employee's gross income.
Health insurance
Corporate health insurance, or group health insurance, is a benefit provided by employers to cover medical expenses incurred due to hospitalisation, surgeries, and other medical treatments.
- How it works: The employer purchases a health insurance policy from an insurance company that covers all employees (and often their families) under a group plan. In some companies, the premium is paid entirely by the employer, while in others, the premium is shared between the employer and the employee.
- Coverage: Corporate health insurance typically covers hospitalisation costs, surgeries, and sometimes outpatient treatments. It may also offer coverage for the employee's dependents, such as a spouse, children, and parents.
- Tax benefits: The premiums paid by the employer for corporate health insurance are not taxable for the employee. However, if the employee pays an additional premium for extended coverage, that portion is eligible for tax deductions under Section 80D of the Income Tax Act in the old tax regime.
Difference between medical allowance and medical reimbursement
The following table highlights the difference between medical allowance and medical reimbursement:
| Parameters | Medical allowance | Medical reimbursement |
| Meaning | It is a fixed amount given to employees every month regardless of whether they provide any bills or not | It is a payment that employers make to employees when they submit medical bills |
| Flexibility | Employees can use this to cover any expenses. | Employees can use this to cover medical expenses only. |
| Employer’s role | Decides the fixed amount | Compensates the actual medical expenses |
| Taxability | Fully-taxable | Fully-taxable |
| Proof of expenditure | Does note require any proof | Requirement of bills for reimbursement |
Medical allowance calculation in salary
Fixed medical allowance is usually calculated as a flat amount and offered to employees on a monthly basis. You can determine your employee’s fixed medical allowance based on the following factors:
- Consider the overall healthcare expenses employees may face.
- Align the allowance with your company’s payroll budget.
- Adjust the allowance based on the employee's level within the organisation, offering higher amounts for senior positions.
For example, if a fresher joins your company with a monthly salary of ₹30,000 (Basic Salary + House Rent Allowance), and your company policy states that all new freshers receive a medical allowance of ₹2,000, the new hire’s monthly gross salary will be ₹32,000.
Is medical allowance taxable?
Yes, any amount received as a fixed medical allowance is fully taxable in the hands of employees, even if they incur medical treatment costs.
This allowance is added to the employee’s taxable income, and the applicable income tax must be deducted by the employer as TDS.
Medical allowance exemption
Fixed medical allowances are considered taxable income, meaning they are subject to income tax. However, employees can claim tax exemptions for certain medical expenses in the old tax regime when filing their income tax returns.
Here’s a summary of the amounts exempted from tax under under Section 80 of the Income Tax Act:
| Medical expense | Yearly amount exempted from tax |
| Health check-ups for the employee, their spouse, children, or parents | ₹5,000 |
| Health insurance premiums for self, spouse, or children | ₹25,000 |
| Health insurance premiums for employee parents who are below the age of 60 | ₹25,000 |
| Health insurance premiums for employee parents who are above the age of 60 | ₹50,000 |
| Maintenance expenditure for a dependent with up to 80% disability | ₹75,000 |
| Maintenance expenditure for a dependent with severe disability (80% or more) | ₹1,25,000 |
| Expenses for treatment of diseases specified in Section 80DDB (for individuals below 60 years) | ₹40,000 or actual amount, whichever is less |
| Expenses for treatment of diseases specified in Section 80DDB (for individuals above 60 years) | ₹1,00,000 or actual amount, whichever is less |
Key takeaways
By being informed about medical allowance, employers can better manage their workforce's benefits and contribute to a supportive and efficient workplace. Implementing a streamlined system for handling medical allowances can significantly enhance administrative efficiency and ensure compliance with company policies.
Zoho Payroll offers a comprehensive solution for managing employee benefits, including medical allowances, with ease. With Zoho Payroll, you can automate the processing of salaries, ensure accurate disbursements and maintain clear records, ultimately supporting a more organised and productive work environment.
Frequently asked questions
What is the medical allowance percentage of basic salary?
There is not a specific percentage of basic salary designated for medical allowance. Instead, employers can provide a fixed medical allowance, such as ₹5,000, ₹10,000 or any other amount, depending on the company’s policies, and employee’s job position.
Is medical allowance part of CTC?
Yes, medical allowance is a part of an employee’s Cost To Company (CTC). Additionally, employees can avail certain tax exemption for this allowance by submitting the required bills to their employers.