Medical Allowance vs Reimbursement: Full Guide

Posted on: Nov 27, 2025 | 3 mins | Written by: HDFC ERGO Team

Medical Allowance vs Reimbursement: Full Guide

Medical Allowance And Medical Reimbursement

Accessing quality healthcare facilities is getting costlier with each passing year. Treatment for a minor cough and cold that cost a few hundred rupees a few years ago now requires spending thousands of rupees. Not only that, but sedentary lifestyles, workplace stress, and pollution are all contributing to a decline in our health. To provide some financial relief, many organisations offer medical allowances or medical reimbursement facilities to their permanent employees. Although both of these financial perks sound similar, they differ greatly.

What Is Medical Allowance

Medical allowance is a fixed amount of money that your employer may provide to you (the employee) as part of your monthly salary package. You or your dependents can use the amount to cover routine medical expenses. The benefit is available regardless of whether you submit the medical bills or not.

What Is Medical Reimbursement

Medical reimbursement is the process through which you receive compensation for medical expenses incurred by yourself or, if applicable, by immediate family members. The reimbursement is made directly by the employer or the group health insurance in place that covers you and other employees.

Depending on the terms and conditions, reimbursement is applicable to doctor consultations, medicines, surgeries, and room charges, up to the specified limit. To receive reimbursement, the employer requires you to submit valid bills and prescriptions for hospitalisation, outpatient treatment, or diagnostic tests.

How They Differ: Key Comparisons

Here is the quick comparison between medical allowance and reimbursement in a tabular format:

Parameters	Medical Allowance	Medical Reimbursement
Definition	It is a fixed monthly payment for medical expenses, which is part of your salary package, regardless of the actual amount spent.	It refers to the repayment of actual medical expenses incurred by you (the employee).
Basis of Payment	Paid irrespective of bills or proof of expenditure	Requires submission of bills and proof of treatment
Taxability	Fully taxable under the Income Tax Act	Medical reimbursements are tax-exempt only under specific scenarios, such as treatment in government or employer-run hospitals, employer-paid insurance premiums, or for serious illnesses in approved facilities, as per Section 17(2) of the Income Tax Act.
Documentation Required	None	Bills, prescriptions, and hospital receipts
Employer Control	Minimal oversight	High control; subject to verification and approval

Tax Rules & Limits for Medical Allowance

As of FY26, medical allowance is no longer separately exempt under the Income Tax Act. From FY 2018–19, the finance minister subsumed the previous exemption benefit of ₹15,000 per annum into the flat standard deduction of ₹50,000 per annum (increased to ₹75,000 under the new regime), which covers erstwhile exemptions like medical and transport allowances.

However, medical reimbursement is still taxed differently under proviso (ii)(b) of Section 17(2) of the Income Tax Act. If you submit valid bills for the treatment of yourself or dependent family members, the reimbursement you receive is tax-exempt, provided the treatment is received at government-approved hospitals or those recognised by the Chief Commissioner of Income Tax.

How to Claim Medical Reimbursement

To claim medical reimbursement, follow the steps outlined below:

• Step 1: Consult with your HR department to determine the company’s medical reimbursement policy. Confirm coverage limits, eligible expenses, and whether it is part of your CTC or a separate benefit.

• Step 2: In the event of a medical emergency, get treatment at the nearest hospital.

• Step 3: Once the treatment is completed, request the billing counter to provide the original medical bills and receipts, hospital discharge summary, and pharmacy bills. Keep the doctor’s prescription and diagnostic reports handy.

• Step 4: Download the official medical reimbursement form from your HR portal. Fill in treatment details, the amount claimed, and attach supporting documents.

• Step 5: Submit the claim within the stipulated timeframe, which ranges from 15 to 30 days, based on the employer’s policy.

• Step 6: If it is not processed within 2–3 weeks, follow up with HR or the third-party administrator (TPA).

Who Offers Medical Allowance & Reimbursement

Here is who offers medical allowances or initiates reimbursement:

• Many private and public sector employers include a medical allowance as a fixed, taxable component of their salary.

• Some organisations, instead of paying medical allowance upfront, reimburse the actual medicine expenses incurred by their employees up to the specified limit.

• If you are a government employee, then the central/state governments reimburse expenses for treatment in approved hospitals or government facilities.

• If you have an individual or a group health policy, you will be reimbursed for hospitalisation and outpatient costs as per the policy terms. The coverage benefits are separate from salary-linked benefits.

When Fixed Allowance May Be Better vs When Reimbursement Is Preferable

Here are different scenarios that state when a fixed medical allowance is better and when reimbursement is preferable:

Fixed Medical Allowance:

• Allowance works better when you want to retain flexibility in spending. Since it is not tied to hospital bills, you may allocate it to over-the-counter medicines, preventive health products, or even save it for other purposes.

• With a fixed allowance, there is no need to maintain or submit medical bills, prescriptions, or receipts. The hassle-free process makes it a convenient option for minor medical treatment.

• The allowance is credited with your salary, allowing instant access to funds. You don’t have to wait for approvals from HR or insurance teams, making it suitable for urgent medical needs.

Medical Reimbursement:

• Some companies allow flexible coverage for specific medical treatments, including surgeries, maternity, or critical illnesses. Depending on your needs and your employer’s policy, you can request for customised cover.

• Since claims require proper documentation and adherence to guidelines, reimbursement ensures employees use verified and authorised medical services. This can lead to better quality treatment and accountability.

• Reimbursement offers tax benefits under Section 17(2) of the Income Tax Act, provided you satisfy the rules laid down in the provisions of this section.

How Health Insurance Helps Cover Gaps

While medical allowance is capped at a few thousand rupees, medical reimbursement, alongside capping, sometimes covers only specific medical expenses and requires prior approval. To bridge this gap, an individual or family floater plan comes in handy.

When you buy a comprehensive health insurance policy, the insurer covers hospitalisation, surgeries, critical illnesses, and even pre- and post-hospitalisation expenses. Moreover, health insurers have partnerships with hospitals across India that provide all necessary healthcare facilities. If you avail treatment at any such hospital, you don’t need to pay anything upfront except for the deductible, as the insurer directly settles the bill with the hospital.

Individual health insurance policies also allow you to customise coverage through riders, available at a small additional premium over the base cover. For example, depending on your needs, you can purchase add-ons such as room rent waiver, maternity cover, hospital cash cover, and critical illness cover.

Conclusion

A medical allowance is a fixed, periodic payment given to employees, regardless of the actual medical expenses incurred. In contrast, medical reimbursement is a claim-based arrangement where employees are compensated for actual medical expenses upon submission of valid bills, up to a specified limit.

Reimbursement is tax-exempt under Section 17(2) of the Income Tax Act, provided documentation meets prescribed norms.

However, considering the limitations of both, it is important to purchase a health insurance policy. When you buy health cover, you can customise the sum insured as per your needs and later use it to cover inpatient treatment, pre- and post-hospital bills, pharmacy expenses, and diagnostic tests.

FAQs on Medical Allowance and Medical Reimbursement

Is medical allowance tax-free?

No, medical allowance is fully taxable as part of gross salary. Even if you, as an employee, use it for medical purposes, it is added to your income and taxed as per your applicable slab rates.

What documents are needed for medical reimbursement?

To claim medical reimbursement, you need to submit original bills, prescriptions, hospital discharge summaries, and payment receipts. Make sure these documents clearly mention the patient’s name, treatment details, and payment mode.

Is medical reimbursement available under the new tax regime?

No, under the new tax regime, there are no separate exemptions for medical reimbursement. You can claim a flat standard deduction of ₹75,000, effective from FY 2024–25, for salaried individuals. The standard deduction subsumes earlier benefits such as transport and medical reimbursements.

Is a medical allowance mandatory for employers to provide?

No, the government does not mandate employers to offer a medical allowance. It is an optional salary component, and if offered, the amount varies widely across organisations and may be merged with other allowances.

Can medical reimbursement cover family members?

Yes, depending on the employer’s policy, medical reimbursement can cover the medical expenses of immediate family members, such as a spouse, children, and dependent parents. However, to claim benefits, you need to submit proof of relationship, a doctor’s prescription, pharmacy bills, and other related documents.

Disclaimer: The above information is for illustrative purposes only. For more details, please refer to the policy wordings and prospectus before concluding the sales.

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