Taxability of Medical Insurance Paid by the Employer

A group medical insurance scheme offers many benefits in addition to providing financial support during medical emergencies. Tax benefits are one of the primary ones. Many businesses and organisations cover the medical insurance of their employees and their families as part of HR policies. In a typical group health cover, the employer pays the premium on behalf of the employees. The employer must be aware of the taxability of medical insurance paid by the employer in order to receive tax benefits under various sections of the Income Tax Act 1961.

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Taxability of Medical Insurance Paid by Employer

Group medical insurance is one of the most common types of employee benefits offered by employers in India. Employers offer this type of insurance as part of the job perks. In most cases, the employer pays the premium for a group health plan, the benefit of which is enjoyed by the employee. For the employer, this insurance is categorized as ‘profit in lieu of salary’.

In 2020, the government issued guidelines for the companies resuming work post the pandemic and nationwide lockdown. As per these guidelines, group health insurance coverage was made mandatory for certain industries. Companies operating in these industries would thus be eligible for tax benefits.

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Tax Benefit of Group Medical Insurance for the Employer

As mentioned above, in Section 17 of the Income Tax Act, the premium paid by the employer for group health insurance is considered to as a “profit in lieu of salary”. This means, the premium paid becomes a part of the fringe benefits or other employee benefits and is thus considered as a business expense. Such tax benefits are considered ‘employer entitlement’ according to the Insurance Regulatory and Development Authority Act, 1999. As a result, employers don’t have to pay any tax on this amount.

If both, the employer and employee, pay the premium, then the employer can gain tax benefits only for the contributed amount and not for the amount paid by the employee.

Let us look at the three scenarios and the taxability of medical insurance paid by the employer in each of these scenarios:

Scenario 1: When the employer pays the complete premium amount.

Tax implication on the employer: The employer can claim the entire premium amount as business expense and claim tax benefits.

Scenario 2: When the employer pays the partial premium amount.

Tax implication on the employer: The employer can only claim the contributed premium amount as business expense and avail benefit to that extent.

Scenario 3: When the employer does not pay the premium amount.

Tax implication on the employer: The employer cannot claim any tax benefit.

Types of Employers Who Can Avail Tax Benefits

Every employer can offer group medical insurance to his employees and subsequently avail tax benefits. Some of the types of employers who can offer this insurance include:

  • Sole proprietors
  • Partnership firms
  • Public organisations
  • Private firms
  • Start-up ventures
  • Small and Medium Enterprises (SMEs)

Case:

Vikas joined the popular firm Cake Stories which covers all their employees under a group health insurance policy. As per the company policy, Vikas contributes 50% of the premium to the group health plan. The rest 50% is paid by the employer. By the end of the year, Vikas can claim a tax deduction under section 80D of the Income Tax Act. The taxability of medical insurance paid by the employer will also be 50% of the total premium amount.

Conclusion:

The benefits of group medical insurance are many. From the employer’s perspective, the taxability of medical insurance paid by the employer is one of the major reasons that make this insurance type highly lucrative. Employers too are leaving no stone unturned in offering comprehensive and need-based group medical insurance.

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Written By: PolicyBazaar - Updated: 21 November 2023

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