Quick Overview
- Medical allowance exemption is a tax exemption on medical benefits provided by the employer under the Indian income tax legislation.
- Fixed medical allowance is subject to tax, whereas medical reimbursement was previously tax-free to a limit (now to a large extent superseded by standard deduction).
- There is no medical allowance exemption in income tax that exists under the new regime.
- Section 80D provides health insurance with more favourable and sustainable tax savings.
- Reimbursement-based exemptions required proper documentation, bills, and schedules to claim.
- The introduction of the standard deduction has minimised the relevance of the medical allowance.
Medical expenses constitute a substantial fraction of household spending, and the Indian income tax system has traditionally provided some relief to the salaried workers to cover the expenditure. Medical allowance exemption is one such concept. Nevertheless, as tax regulations have changed, particularly with the standard deduction, the applicability and relevance of the medical allowance changed as well.
This article defines what a medical allowance exemption in salary means, how it is taxed, whether it is eligible, how to compute it, its examples, and its comparison with health insurance as a tax-saving device.
What Does “Medical Allowance Exemption” Mean?
Medical allowance exemption is a part of medical-related benefits paid by an employer, which are not subject to taxation under the Income Tax Act, with certain conditions. Historically, this exemption used to be applied to medical reimbursement, rather than to a fixed medical allowance.
Is Medical Allowance Fully Tax-Free?
No. A fixed medical allowance paid as part of salary is fully taxable. There is no standalone medical allowance exemption in income tax for fixed allowances, regardless of actual medical expenses incurred.
Only medical reimbursements (subject to rules and limits) were earlier eligible for exemption.
Medical Allowance Under the Income Tax Act
Medical allowance has often been misunderstood as a tax-free salary component. In order to see how it is actually taxed, it is worth considering how the Income Tax Act considers medical-related benefits and how it has evolved.
Medical Allowance Is Not an Exempt Allowance Under Section 10
Section 10 of the Income Tax Act contains a list of allowances that are exempt, fully or partly, from taxation, including House Rent Allowance (HRA), Leave Travel Allowance (LTA), and some special allowances. This list does not include medical allowance.
This implies that there has never been a direct medical allowance exemption in income tax under Section 10. Any sum that an employer pays out as a fixed medical allowance has always been included in taxable salary, whether used by the employee or not.
Previous medical expense tax relief was not based on an allowance-based exemption, although it was based on reimbursement-based provisions.
Which Section Covered Medical Allowance Exemption Earlier?
The tax benefit for medical expenses was earlier available through Section 17(2) of the Income Tax Act, which deals with “perquisites.” Under this section:
- Medical reimbursement provided by the employer
- For the treatment of the employee or eligible family members
- Against actual medical bills
was treated as a non-taxable perquisite up to a specified limit.
It is important to note that this benefit applied only to medical reimbursement, not to a fixed medical allowance paid monthly as part of salary. The moment an amount was paid as a fixed allowance without linking it to actual expenses, it became fully taxable.
With effect from FY 2018–19, this exemption under Section 17(2) was withdrawn and replaced with the standard deduction.
Maximum Limit Allowed for Medical Expense Exemption
Before FY 2018–19, salaried employees could claim a medical reimbursement exemption of up to:
- ₹15,000 per financial year, and
- Only if actual medical expenses were incurred and supported by bills
Key points under the earlier rule:
- If medical expenses were less than ₹15,000, the exemption was limited to actual expenses
- If expenses exceeded ₹15,000, the excess amount became taxable
- Bills had to be submitted to the employer within the prescribed timelines
This limit of ₹15,000 was not an allowance but a cap on tax-free reimbursement. Once the standard deduction was introduced, this limit ceased to exist, and medical reimbursement lost its separate tax-exempt status.
Is Medical Allowance Taxable After Standard Deduction?
Yes. After the introduction of the standard deduction, the medical allowance continues to be fully taxable.
Currently:
- Salaried employees can claim a standard deduction of ₹.50,000 from their salary income.
- This deduction is allowed irrespective of the actual medical expenses or allowances.
- Any medical allowance component in salary is included in gross salary and taxed as per the applicable slab.
There is no additional medical allowance exemption in salary over and above the standard deduction. Whether or not you incur medical expenses, the tax treatment of medical allowance remains the same.
Types of Medical Allowance in Salary
Understanding the structure of medical benefits is crucial for tax planning.
Fixed Medical Allowance
- Paid monthly as part of the salary
- No requirement to submit bills
- Fully taxable
- Included in gross salary
Medical Reimbursement
- Paid only after submitting medical bills
- Earlier exempt up to prescribed limits
- Exemption withdrawn now
- Excess reimbursement taxable
Employer-Provided Group Health Insurance
- Premium paid by the employer is not taxable
- Claims received from the insurer are tax-free
- Considered a perquisite benefit, not an allowance
Difference Between Medical Allowance and Medical Reimbursement
Aspect |
Medical Allowance |
Medical Reimbursement |
Nature |
Fixed amount paid monthly as part of salary without conditions. |
Amount paid by the employer against actual medical expenses incurred. |
Salary component |
Always included in gross salary and taxed accordingly. |
Included in salary only if reimbursement conditions are met. |
Taxability |
Fully taxable in the year of receipt. |
Earlier partly exempt, now fully taxable. |
Tax treatment under current law |
No tax relief available under any section. |
No separate exemption is available after the standard deduction. |
Medical allowance exemption in income tax |
Not available under any provision. |
Withdrawn from FY 2018–19 onwards. |
Bills required |
No medical bills or proof are needed. |
Original bills and prescriptions were mandatory. |
Type of documents |
No documentation required at all. |
Bills, doctor’s prescription, and payment receipts required. |
Employer verification |
The employer does not verify the usage of the allowance. |
The employer had to verify and approve the submitted bills. |
Flexibility of usage |
Can be spent on any personal or household expense. |
Restricted strictly to medical treatment expenses. |
Eligible expenses |
No restriction on how the money is used. |
Consultation, medical hospitalisation, and hospitalization. |
Eligible family members |
Not applicable as usage is unrestricted. |
Self, spouse, children, and dependent parents. |
Preventive/cosmetic expenses |
Allowed since allowance is unrestricted. |
Generally not allowed under reimbursement rules. |
Earlier exemption limit |
No exemption was ever available. |
Exempt up to ₹15,000 per year before FY 2018–19. |
Condition of actual expense |
Not required to incur medical expenses. |
Actual medical expenses were compulsory. |
Submission timelines |
No timelines applicable. |
Bills had to be submitted within employer-defined limits. |
Effect of missing/invalid bills |
No impact, allowance remains taxable. |
The reimbursement amount became taxable if the bills were invalid. |
Tax-saving effectiveness (earlier) |
Ineffective for tax saving. |
Provided a limited tax benefit earlier. |
Tax-saving effectiveness (current) |
No tax-saving benefit. |
No tax-saving benefit. |
Replacement benefit |
is indirectly covered under the standard deduction. |
Merged into the standard deduction benefit. |
Better alternative today |
Health insurance with Section 80D benefits. |
Health insurance with Section 80D benefits. |
Eligibility for Claiming Medical Allowance Exemption
Who Can Claim Medical Expense Exemption?
Earlier, only salaried employees receiving reimbursement from employers could claim it. Today, no direct medical allowance exemption in income tax is available.
Eligible Family Members for Medical Claims
Previously allowed:
- Self
- Spouse
- Children
- Dependent parents
Eligible Medical Expenses Covered
- Doctor consultation
- Medicines
- Diagnostic tests
- Hospital treatment
Hospitals and Treatment Types Allowed
- Government or private hospitals
- Recognized clinics
- Allopathy, Ayurveda, and certain alternative treatments
How to Calculate Medical Allowance Exemption
Step-by-Step Medical Reimbursement Calculation (Old Method)
- Total medical bills incurred
- Reimbursement received from the employer
- Lower of ₹15,000 or actual expenses was exempt
- Balance added to taxable salary
Treatment When Medical Expenses Are Below or Above the Allowed Limit
Under the earlier medical reimbursement rules, the exemption was strictly limited to the actual medical expenses incurred during the financial year. If an employee’s medical expenses were less than the prescribed limit, the exemption was available only up to the amount actually spent, and the unutilized portion was treated as taxable income. On the other hand, if medical bills exceeded the allowed exemption limit, the excess amount was added back to the employee’s taxable salary, as tax relief was capped and could not be claimed beyond the specified threshold.
Medical Allowance Exemption
Example for Salaried Employee with Medical Reimbursement
- Annual salary: ₹6,00,000
- Medical reimbursement received: ₹15,000
- Medical bills submitted: ₹12,000
Exempt amount: ₹12,000
Taxable amount: ₹3,000
Example for Fixed Medical Allowance in Salary
- Monthly medical allowance: ₹1,250
- Annual allowance: ₹15,000
The entire ₹15,000 is taxable, irrespective of medical expenses.
Tax Impact Comparison With and Without Medical Bills
With reimbursement and bills, taxable income is reduced earlier. With allowance, no reduction occurs.
Medical Reimbursement Rules You Should Know
Documentation and Bill Submission Rules
- Original bills only
- Employer verification mandatory
- Bills in an employee's or family member’s name
Time Limits for Submitting Medical Bills
Bills had to be submitted within the financial year or as per employer policy.
Consequences of Missing or Invalid Bills
- Reimbursement is treated as taxable income
- Added back to salary
Is Medical Allowance Still Relevant Today?
Impact of Standard Deduction on Medical Allowance
The standard deduction replaced medical reimbursement and transport allowance, simplifying taxation but removing item-wise exemptions.
Why Health Insurance Is a Better Long-Term Alternative
- Covers high medical costs
- Tax deduction under Section 80D
- No dependency on employer
How Health Insurance Complements Tax Savings
Health insurance premiums and preventive check-ups offer direct tax deductions, unlike the medical allowance exemption in salary.
Role of Health Insurance in Managing Medical Expenses
Why Health Insurance Is Better Than Medical Allowance
- Higher financial protection
- Covers hospitalisation and critical illnesses
- Tax-efficient
Conclusion
A fixed medical allowance paid as part of salary is fully taxable, with no relaxation available under the Income Tax Act. At present, there is no separate medical allowance exemption in income tax, as the earlier medical reimbursement benefit has been withdrawn. Employees often assume that medical allowance reduces taxable income, but in reality, it is treated just like any other salary component and taxed accordingly.
The exemption that once applied to medical reimbursement has been effectively replaced by the standard deduction, which offers a consolidated and simpler form of tax relief to salaried taxpayers. While this has streamlined compliance, it has also reduced flexibility for claiming item-specific medical benefits. In today’s tax framework, health insurance emerges as a more effective solution, providing both financial protection and meaningful tax benefits, making it a better alternative to medical allowance-based planning.
FAQs
Is medical allowance exempt from income tax?
No. Fixed medical allowance is fully taxable under current tax laws.
How is medical allowance treated in salary?
It is added to gross salary and taxed as per the applicable slab.
Can I claim medical allowance exemption without bills?
No exemption is available, with or without bills.
What is the difference between medical allowance and medical reimbursement?
Medical allowance is fixed and taxable; reimbursement was conditional and earlier exempt.
Is a medical allowance exemption available under the new tax regime?
No. The new tax regime does not allow medical allowance exemption.
Is medical allowance taxable every month?
Yes, it is taxed as part of the monthly salary income.
Can parents’ medical expenses be claimed?
Not under medical allowance. However, health insurance premiums for parents are deductible under Section 80D.
