Oct 082014

Medical Allowance v. Medical Reimbursement

In most of time name does make a difference. But our income tax act is an exception of this. Here nomenclature can make a big difference. Whether you are receiving Medical allowance or Medical reimbursement, will make a lot of difference to your tax bill.

How does name makes a difference?

Payment under head Amount Technically meaning Impact on tax bill
Medical Reimbursement Payment to employee depends on actual expenses incurred by employee.In no case payment can not exceed expenses subject to any ceiling limit, if any, fixed as per policy of the company. Employee has no scope of benefit. What he gets from employer is actual expenses incurred as supported by original bills submitted with claim report. Whatever employee gets under Medical reimbursement is not taxable up to Rs. 15,000. It’s a tax free receipt.
Medical Allowance Payment to employee is fixed as per policy of the company.It does not have relation with the actual expense incurred by him. Payment involved and timing of payment is always certain. Fully taxable.

Practical issues and their solutions:-

Issue:- Is there any restriction on expenses availing benefit?

Yes, all expenses incurred on self and dependable relative shall be consider on availing the exemption benefit. Relative of medical reimbursement shall include spouse, children, parent, brother and sister. Expenses incurred on any other person shall not be consider.

Issue:- What if employees does not submit the bills?

In such case payment shall be consider as medical allowance and entire payment shall be taxable. It is only after due verification of bills employer reimburses employee, subject to pre decided limits, medical reimbursement up to Rs. 15,000 is exempted.

Issue – What are departmental controls over employer to ensure that correct reimbursement is provided to employee?

It is the employer’s responsibility to pay medical reimbursement only against authentic bills. Any incorrect payment will make employer liable for following:-

  • This will lead to short deduction of TDS
  • Short deduction of TDS will make him assessee in default and all consequences will follow accordingly
  • Disallowance of expenses for non deduction and non deposit of TDS

As employers are open to audit and scrutiny by both tax auditors and I-T department and thus they can be catch easily.

By: Sensys Technologies

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