Can a business owner deduct medical expenses while computing business Income for Income tax

Can a business owner deduct medical expenses while computing business Income for Income tax

In recent times medical expenditure has become a major element of cost for every person.

Most of the people prefer to have medical insurance to cover medical expenses. However medical insurance does not cover all types of illness (depend upon type of policy taken) and sometime premium is very high that many people may be reluctant to take the same.

Beside it medical insurance covers the cost of hospitalization and in very few cases OPD (outpatient department) or visit to any doctor expenses are covered.

The owner of the business may also incur huge medical expenses and in this article we will cover whether the same will be allowed as business expenditure in case they are not covered by insurance (in case covered by insurance then whether disallowed medical expenses by insurance company can be treated as business expenditure).

We know generally there are three forms of business:

1. Sole proprietorship business

2. Partnership firm (including LLP- Limited Liability Partnership).

3. Company (i.e Pvt Ltd company or Public Limited Company)

1) Allowability of medical expenditure incurred by proprietor in case of Sole proprietorship business

In case of sole proprietorship business only the business expenditure are allowed as deduction under the head “Profit and gains of Business or Profession”.

All the expenditure incurred by proprietor is treated as personal expenses of proprietor (except when incurred for the purpose of business). Even no deduction on account of salary or remuneration to proprietor is allowed as business expenditure since the proprietor and business are treated as same (and they both have same PAN i.e no separate PAN is there for the business).

Now take the example of lawyer who is working in individual capacity in a proprietorship legal firm. If he incurs hospitalization expenses of Rs 5 Lacs (assuming no medical insurance) then this whole expenditure of Rs 5 Lacs would be treated as personal expenditure of the lawyer. Even the logic that without him the business can’t run so he is an important part of the business and all the expenditure incurred to keep him fit to run the business should be allowed as business expenditure does not hold good under the Income Tax provisions as they are not covered under section 30 to 38 of Income Tax Act 1961.

Hence a proprietor of sole proprietorship business can’t claim his medical expenses as business expenditure while computing profit from business for tax.

However if the proprietor reimburse medical expenses to any of his employee then the same can be treated as business expenditure. The same will be treated as salary in hands of employee and will be taxed separately subject to certain exemption (like treatment in hospital maintained by employer, notified hospitals having Income tax exemption, reimbursement received for COVID treatment in FY 2019-20 onwards etc).

2) Allowability of medical expenditure incurred by partners in case of partnership firm (including LLP)

In case of partnership firm (including LLP) the expenditure incurred by partners are allowed as business expenditure only when the same is incurred for the purpose of business.

In contrast to proprietorship business, partners are allowed remuneration and interest on capital [subject to limit prescribed u/s 40(b)].

A partner of the firm can’t be allowed any allowable expenditure payment beyond the limit prescribed u/s 40(b).

Hence in case of partnership firm if payment is made to the partner on account of medical expenses and the amount of medical expenses reimbursed to partner inclusive of other remuneration is within the limit of section 40(b) then the same will be allowed as business expenditure under the head remuneration to partner to the partnership firm.

In nutshell no additional deduction to business is allowed under the head medical expenses reimbursed to partners.

However the medical expenses paid for the employees of the firm is allowed as business expenditure without any limit and the same is taxable in the hands of employee under the head salary subject to certain exemption (like treatment in hospital maintained by employer, notified hospitals having Income tax exemption, reimbursement received for COVID treatment in FY 2019-20 onwards etc).

It may be noted that remuneration received by partner from partnership firm is taxable under the head “Profit and gains of Business or Profession” and not “Income from Salary”.

3) Allowability of medical expenditure incurred by Directors (including C&MD) in case of company (whether Pvt Ltd or Ltd)

In the case of company the ultimate owners are shareholders of the company. However directors are responsible for taking day to day decisions for operation of business and they are the virtual controller of the company.

Under Income tax act, directors are treated as employee and hence any medical expenditure is incurred by company then the same is allowed as business expenditure.

The amount received by the directors (including amount directly paid by company to hospital) on account of medical expenses will be treated as income of director under the head “Income from Salary” and exemptions are available subject to fulfillment of certain conditions (like treatment in hospital maintained by employer, notified hospitals having Income tax exemption, reimbursement received for COVID treatment in FY 2019-20 onwards etc)

The above provisions can be summarized as below:

The expenses disallowed by Insurance company (say claim was lodged for Rs 4 lacs and only Rs 3 lacs was allowed by Insurance company) can be treated as business expenditure only when the same is paid to employee by employer as medical reimbursement. In the case of partners the same will be covered within limit of sec 40(b),

In the hands of employee (including directors and C&MD) the amount received as medical expenses is taxable under the head “Income from Salary” and exemption is available subject to fulfillment of certain conditions (like treatment in hospital maintained by employer, notified hospitals having Income tax exemption, reimbursement received for COVID treatment in FY 2019-20 onwards etc).