Medical allowance is a facility or benefit given by the employer to his employee for the expense incurred on any medical treatments or hospitalization. It can be in the form of
- Cash reimbursement
- Paying directly for the hospitals bills or
- Any allowance included in the break-up of the gross salary.
For tax treatment in accordance with clause 139 of Part I of Second schedule of the income tax ordinance 2001.
- Medical allowance is exempt upto 10% of basic salary if no other facility is provided by the employer like medical reimbursement facility is not available in the organization.
- Amount exceeding 10% of basic salary shall be chargeable under the head “Salary”.
- If free medical benefit or facility is available to the employee by an employer shall be exempt from tax after fulfilling certain conditions:
- Reimbursement will be made in accordance with the terms of employment
- Proper receipts / bills of the hospital or clinic bearing NTN.
- The receipts shall be duly certified and attested by the employer.
For Examples: Mr. Kashif is earning basic salary of Rs. 500,000 per month. He received a medical allowance of Rs. 45,000 per month. What will be the tax treatment in the below cases
- No free medical facility is given to him by the employer
- Free medical facility of Rs. 350,000 given by the employer after approval
- For calculation of tax liability see rates from the first schedule of the income tax ordinance.
No free medical facility is given to him by the employer
| Basic salary (500,000 x 12) | = 6000,000 | |
| Medical allowance (45,000 x 12) | = 540,000 | |
| Less: 10% exempt | = (600,000) | = Nil (as exempt amount is higher) |
| Total taxable income | = 6000,000 | |
| Tax liability {670,000 + (1000,000 x 22.5%)} | = 895,000 | |
Free medical facility of Rs. 350,000 given by the employer after approval
| Basic salary (500,000 x 12) | = 6000,000 |
| Medical allowance (45,000 x 12) | = 540,000 |
| Total taxable income | = 6540,000 |
| Tax liability {670,000 + (1540,000 x 22.5%)} | = 1016,500 |
Free medical of Rs. 350,000 is exempt whereas medical allowance shall be chargeable to tax under the above discussed clause of the ordinance.