Taxability of medical insurance by employers

Medical insurance has become one of the most valued employee benefits in today's workplace. As employers try to offer comprehensive healthcare coverage to their workforce, group medical insurance has become increasingly common. But this also raises important questions about taxation — both for the company and the employees.

Do you have to pay tax on the medical insurance provided by your company? How does it affect your salary structure or take-home pay? And what about the TDS on insurance premium paid by company? Let’s discuss it all.

Tax rules for employers

When employers provide medical insurance for their employees, the tax treatment depends on how the policy is structured and who the beneficiaries are.

Here’s how it works:

1. Business expenditure

• The premium paid by the employer for group health insurance is considered a business expense.
• This means it can be claimed as a deduction under Section 37(1) of the Income Tax Act, 1961.
• The benefit is allowed as long as the policy is for employees and is not a personal benefit to the directors or partners.

2. Tax Deducted at Source (TDS)

• Generally, there is no TDS on insurance premium paid by company when the benefit is part of the employment package.
• However, if the premium includes dependents like family members or if it’s paid in lieu of a salary component, TDS could apply.

3. GST implications

• Employers paying the premium can also claim input credit on the GST paid, provided it is mandated by law or is part of the contractual obligation with employees.
• If the policy is a contractual obligation (mentioned in the employee’s terms of employment), then input GST credit can be availed. However, if the policy is not mandatory, the input credit is not allowed under GST.

4. Policy types matter

• Policies like workmen compensation policy, which provide cover for workplace-related injuries, are treated differently under tax laws. These are often considered statutory obligations and not taxable perquisites.
• A workmen compensation policy is typically mandated under the Employee’s Compensation Act, 1923, to cover expenses in case of injury, disability or death during the course of employment.

5. Impact on profitability

• Offering group medical insurance improves employee retention, enhances workplace morale and ensures a healthier workforce, all of which positively impact long-term profitability.
• From a compliance perspective, offering medical insurance helps employers stay on the right side of labour and welfare laws.

Tax implications for employees receiving medical insurance

While employers enjoy certain tax deductions, it’s equally important to understand what happens from the employee’s end:

1. Taxability of premiums paid by employer

• The taxability of medical insurance by employers comes into play only when the premium is paid for non-employees or is over and above your standard employment benefits.
• If your employer pays the entire premium for you, and it's strictly a group policy, then it's not considered a taxable perquisite.

2. Family coverage and TDS

• If your employer covers your family (spouse, children, parents) under the group plan, it may or may not be taxable depending on how it is treated in the salary structure.
• If the premium for dependents is considered as a part of the Cost-to-Company (CTC), it may be interpreted as a perquisite, attracting TDS on insurance premium paid by company.
• However, in most practical scenarios, it is not taxed unless the benefit substitutes any part of your monetary salary.

3. Medical reimbursement vs. insurance

• If your employer offers a proper insurance plan and not direct reimbursement, then the premium paid on your behalf is not taxed.
• Insurance claims received by you from such policies are tax-free as per Section 10(10D) of the Income Tax Act.

4. Claim settlements and maturity benefits

• Amounts received from the insurance company (either as hospitalisation claims or reimbursements) are tax-free.
• Maturity proceeds under group term life insurance, if any, are exempt under Section 10(10D), subject to certain conditions.

5. Preventive health check-ups and wellness benefits

• Some employers extend wellness benefits like preventive health check-ups, doctor consultations or gym memberships.
• If these benefits are part of the policy package and are offered to all employees, they are not considered taxable.
• However, personalised or exclusive health benefits may be considered perquisites and taxed accordingly.

6. Portability and continuity

• Some group health insurance plans allow portability into individual plans upon leaving the company.
• If you opt for portability, you will begin paying the premium yourself. From this point onwards, you can claim tax deductions under Section 80D.

7. Special scenarios to consider

• If your company provides a floater sum insured that includes parents or in-laws, check whether this is structured as a benefit or a salary component. This could change the taxability of medical insurance by employers from exempt to partially taxable.
• For employees in senior roles or international assignments, companies may offer high-value corporate policies, which could trigger perquisite taxation.

8. Voluntary top-up cover

• Sometimes, employers allow employees to add a top-up over and above the group policy by paying an extra premium.
• The extra premium paid by you can be claimed under Section 80D of the Income Tax Act, up to INR 25,000 (or INR 50,000 if you are a senior citizen).

Conclusion

Employer-provided medical insurance is usually tax-free and offers both health security and financial relief. For employers, it’s a valid business expense; for employees, it's rarely taxable unless structured as part of the salary. Make sure that you understand your policy details, especially coverage for dependents, and don’t confuse it with a workmen compensation policy, which serves a different purpose.

Disclaimer: The information provided in this blog is for educational and informational purposes only. It is advised to verify the currency and relevance of the data and information before taking any major steps. Please read the sales brochure / policy wordings carefully for detailed information about on risk factors, terms, conditions and exclusions. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.