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Treatment of medical allowance - K. K. ADVISORS

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

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

 

  1. No free medical facility is given to him by the employer
  2. 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.

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