BANGALORE: If medical reimbursement to an employee during a year exceeds Rs. 15,000, the incremental sum will be treated as salary and taxed at the applicable slab rate. However, if the reimbursement does not exceed Rs. 15,000, then employers (companies) will have to pay Fringe Benefit Tax (FBT) and corporate tax on the amount.

The Union Finance Ministry's decision to bring medical reimbursement under the ambit of the newly introduced FBT has baffled both employers and employees alike, triggering calls for amending the Income Tax Act to remove the anomaly.

At present, neither employer nor employee pays any tax on medical reimbursement up to Rs. 15,000.

Since medical reimbursement comes under "employee welfare," the deemed benefit for FBT is calculated at the rate of 20 per cent on Rs. 15,000, which works out to Rs. 3,000. On this, companies will also have to pay a corporate tax of 33.66 per cent, that is Rs. 1,009.80.

"Coupled with the levy of corporate tax, the tax treatment of medical reimbursements under FBT will have a huge impact on companies with a large employee base," say P.V. Srinivasan, Vice-President, Corporate Taxation, Wipro Ltd.

Not surprisingly, companies have started searching for ways to circumvent the provisions and come out of the FBT net. One of the ideas that have been thrown up in corporate circles is to exceed the medical reimbursement limit beyond Rs. 15,000 so that the incremental portion is taxed in the hands of the employee who will also enjoy tax benefits under the exempted portion without in any way impacting the companies.

Another view

Another view that has emerged is the imminent need for the Union Finance Ministry to remove the "absurdity" in the clarifying circular on FBT provisions issued on August 29.

Employees are required to pay income tax only on that portion of the reimbursement exceeding the exempted level of Rs. 15,000. Employers will have to pay FBT if the reimbursement does not exceed Rs. 15,000, in addition to corporate tax.

Mr. Srinivasan says that medical reimbursement up to Rs. 15,000 is nothing but non-taxable income like allowances under Section 10 (14) and 10 (5) of the Income Tax Act. "Hence, there is no reason to treat it on a different footing and subject it to FBT," he says.

K.R. Girish, partner, RSM & Co. said that the "absurdity" in the circular needs urgent clarification as it sends a "wrong connotation." "It immediately requires an amendment to the Act," he told The Hindu . According to the Finance Ministry, if the reimbursed amount exceeds Rs. 15,000 during the year, such sum is `salary' as defined under the Income Tax Act and liable to income tax in the hands of the employee and, hence, not liable to FBT.

However, if it does not exceed Rs. 15,000, such sum does not fall within the meaning of `salary' as defined under the Act and is not liable to income tax in the hands of the employee. "Since such sum is not taxable in the hands of the employee, the same is liable to FBT," the Ministry has categorically stated in the circular.

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