Recently, healthcare costs have increased significantly due to the pandemic. The medical inflation rate in India rose to 8% in 2021, making investments in medical insurance crucial.
The government has made it mandatory for organisations to provide employees with a medical policy, a benefit otherwise known as group health insurance. Individual insurance is not affected by the group plan. You can always add additional coverage to this group policy if you don’t have one already.
Under the group insurance policy, employers need to pay premiums to benefit the employees. So, what will be the tax treatment for such an arrangement?
This article explores the tax rules of group medical insurance premiums paid by the employer.
What are the tax rules on group medical insurance premiums paid by employers?
When an employer pays the group medical insurance premium for employees, it benefits them. Employers attract and retain the best talent for the organisation and benefit from increased employee productivity, long-term loyalty, and organised processes, resulting in higher revenues. Such benefits are also called fringe benefits or employee benefits.
As the organisation invests in its employees for the business’ success, this expense will be considered a business expense and taxed accordingly.
Under the Income Tax rules, if an employer pays any amount for the employee’s benefit, such a benefit is known as ‘Profit in lieu of salary’. These are benefits over and above the basic employee pay. Section 17 of the Income Tax Act, 1961, covers these in detail.
A brief explanation of Section 17 of the Income Tax Act, 1961
‘Perquisites’ are defined under section 17(2), and ‘Profits in lieu of salary’ are defined under Section 17(3) of the Income Tax Act, 1961. Section 17(3) states that the following incomes fall under ‘Profit in lieu of salary.
- Any payments under the Keyman Insurance policy
- Any payments from an unrecognised provident fund or unrecognised superannuation fund
- Any compensation to an employee due to retirement, premature termination, or otherwise, including modifications to the terms and conditions.
- Any amount received by an employee before joining the employment or receivable after cessation of the job
- Any other payment made by an employer, either voluntarily or legally mandatory, towards the employee
However, the following payments are not deemed as ‘profits in lieu of salary’
- Any payment from a recognised provident fund
- Any income from a recognised statutory fund
- House Rent allowance
- Workers’ retrenchment compensation amount
Applicability of TDS on premiums paid on group medical insurance
As per the TDS (Tax deducted at source) rules, the person paying the tax incurs the expenditure. Now, premiums paid for employees’ health insurance are also a business expense; however, as per Income tax rules, TDS is not applicable on such insurance premiums. In other words, no TDS is deducted at the time of such payments. Insurance companies also do not accept TDS deductions on insurance premiums paid by the employer.
Tax deductions on medical insurance premiums paid by the employer
As mentioned above, any medical insurance premiums paid by employers for their employees are considered business expenses. The employer can show the entire amount paid in their profit and loss account and reduce tax liability. Furthermore, there is no limit on the number of premiums paid.
However, it is necessary to show that the payer and the payee are in an employer–employee relationship to claim this amount. Sometimes, even employees contribute to these premiums.
Thus, the question arises, how much amount can employers show to claim tax benefits?
Case1: Where the employer bears the entire premium for the insurance
- In such a case, since the employer bears the expense of the whole premium of the group insurance, they are entitled to claim tax benefits on the entire amount.
Case 2: Where the employer pays the majority of the premium
- In such cases, the employer does not pay the entire premium. Thus, the balance premium is paid by employees. Therefore, employers can report only the amount of premium they pay and hence, cannot claim tax benefits on the whole amount. Employees can claim the tax deduction for the amount paid by them under Section 80D of the Income Tax Act.
Case 3: Where the employee pays the entire insurance premium
- Since the employee bears the payment of the whole premium, there is no question of accounting and taxability for the employer.
In a nutshell
After reading the above article, you will have a good understanding of the medical insurance tax rules paid by the employer. Group medical insurance covers doctor consultations, hospitalisation expenses, counselling sessions, and wellness programs. Today, insurers offer customised options to meet the needs of their policyholders. Plum Insurance, for example, in addition to providing customised packages, also offers super top-up plans for employees.