In the COVID-19 pandemic where everyone is suffering physically and financially, many employers have come forward to reimburse the expense of medical treatment of COVID-19 of their employees. The Income Tax Department has neither release any clarification about its taxation nor provided any exemption as on date. In this article we are hereby discussing the taxation treatment of this on the basis of the law available.

Section 17 of the Income Tax Act:

Section 17(2) of the Income Tax Act provides the definition of the perquisite. The sub-section does not specifically provides the medical reimbursement by employer to employee as perquisite, however, the definition is inclusive in nature, therefore, reasonably the value of medical reimbursement by the employers to its employee shall be treated as perquisite in the hands of the employee other than those provided in the proviso to the sub-section.

The proviso is as follows:

Provided that nothing in this clause shall apply to,—

    • the value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer;
    • any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family—

1. in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees;

2. in respect of the prescribed diseases or ailments, in any hospital approved by the Principal Chief Commissioner or Chief Commissioner having regard to the prescribed guidelines”

In other words, the proviso provides that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in respect of the prescribed diseases or ailments, in any hospital approved by the Principal Chief Commissioner or Chief Commissioner having regard to the prescribed guidelines shall not be treated as perquisite.

Prescribed diseases or ailment

The prescribed diseases or ailments are mentioned in the rule 3A(2) of the Income Tax Rules which are as follows:

(a) cancer;
(b) tuberculosis;
(c) acquired immunity deficiency syndrome;
(d) disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or the skin, requiring surgical operation;
(e) ailment or disease of the eye, ear, nose or throat, requiring surgical operation;
(f) fracture in any part of the skeletal system or dislocation of vertebrae requiring surgical operation or orthopaedic treatment;
(g) gynaecological or obstetric ailment or disease requiring surgical operation, caesarean operation or laperoscopic intervention;
(h) ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days;
(i) gynaecological or obstetric ailment or disease requiring medical treatment in a hospital for at least three continuous days;
(j) burn injuries requiring medical treatment in a hospital for at least three continuous days;
(k) mental disorder – neurotic or psychotic – requiring medical treatment in a hospital for at least three continuous days;
(l) drug addiction requiring medical treatment in a hospital for at least seven continuous days;
(m) anaphylectic shocks including insulin shocks, drug reactions and other allergic manifestations requiring medical treatment in a hospital for at least three continuous days.

Though the reimbursement of medical expenditure of COVID-19 disease by employer to employee is not specifically mentioned in this rule. However, there are two points from the above mentioned points under which we can exempt this reimbursement which are as follows:

(d)  disease or ailment of the heart, blood, lymph glands, bone marrow, respiratory system, central nervous system, urinary system, liver, gall bladder, digestive system, endocrine glands or the skin, requiring surgical operation;

(h) ailment or disease of the organs mentioned at (d), requiring medical treatment in a hospital for at least three continuous days;

In consideration to these clauses, respiratory disease requiring surgical operations or medical treatment in a hospital for at least three continuous days shall be considered as prescribed diseases or ailment. Further, COVID-19 is a disease which affects respiratory system. Therefore, the COVID-19 disease which requires surgical operations or medical treatment in a hospital for at least three continuous days shall be eligible to claim as prescribed diseases or ailment. Therefore, reimbursement for the medical treatment of the employee or any member of his family in these cases shall not be treated as perquisite for the employee.

In addition, medical treatment shall be in the hospital approved by the Principal Chief Commissioner or Chief Commissioner who guidelines are mentioned in Rule 3A(1) of the Income Tax Rules. It is also highlighted that employee should have a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital.

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