Deduction in respect of health insurance premia (Mediclaim Insurance) [Section 80D]

In our knowledge quest, i would like to share the information on particular topic of Direct Taxation which according to me, more useful to the young chartered accountants. My attempt is to focus on the angle by which any section is ought to be viewed by the young professional with a view to inculcate the habit of thinking based on logical reasoning.

 In this regard, our first topic is Deductions by Income Tax on Medical Expenses.

Deduction in respect of health insurance premia [Section 80D]

  • The objective of the Government to introduce section 80D was to provide relief to the self-employed persons and salaried employees who do not get any tax benefit in respect of medical expenses incurred by them.

Excerpt from the budget speech of the then finance minister Shri V.P.Singh at the time of introducing Section 80D for the first time in the budget of 1986-87.

Excerpt from the budget speech of the then finance minister Shri V.P.Singh at the time of introducing Section 80D for the first time in the budget of 1986-87.

Is Quantum of Deduction is fair enough?

We can say that Income tax department is kind enough as it has been giving this deduction to assessee since 30 years however at the same time he has not been fair enough in deciding quantum of deduction. In the span of 30 years ,the maximum amount of deduction one could availed on standalone basis has been increased from Rs.3000 to Rs.30000 but where the average cost of medical expenses now a days have been increased exponentially ,such amount could not help much so far as reduction in tax outgo is concerned. Government should give separate limit for medical expenditure incurred by the assessee during the year instead of clubbing it with the health insurance premium.

Important Words & Phrases used in Section 80D:

Words & Phrases: “Deduction in respect of health insurance premia”

Q-1: Heading of Section 80D use the word health insurance premia instead of premium .Why??

Word “Premia” is the plural of Premium i.e. premiums. Here using the word premia indicates that deduction is not confined to the single premium but available to the aggregate of several premiums paid during the year.

Words & Phrases:  “Any Mode other than cash”

According to Section 80D (2B) payment shall be made by “any mode other than cash”

Here, after analyzing relevant rules and sections of Income tax Act “any mode other than cash” may include following mode of payments:

  • Payment by an account payee cheque
  • Payment by an account payee bank draft
  • Payment through Internet banking (Online Payment /NEFT / RTGS)
  • Payment through Credit or Debit Cards
  • Payment through use of electronic clearing system (ECS)

Reference:

  • Rules: 6DD, 37CA, 125 of Income Tax Rules-1962
  • Sections: 40A(3),80G (5D), 269SS
  • Circulars : (1) 5/2008,dated 14-7-2008

Words & Phrases: “To effect or to keep in force”

According to Section 80D (2) The deduction is available in respect of the whole of the amount paid to effect or to keep in force an insurance on the health of the assessee or his family or his parents.

According to Oxford dictionary

“Effect” means the state of being or becoming operative

According to Oxford dictionary

“In force” means in or into effect

Here the use of word amount paid “to effect” an insurance may refer to the amount paid to obtain new insurance   AND

The use of word “keep in force” an insurance may refer to the amount paid to continue or to maintain or to keep the existing insurance active.

Words & Phrases: “Payment has to be Out of the income chargeable to tax”

According to Section 80D, to claim deduction, the payment has to be made out of the income chargeable to tax.

To understand the meaning of “income chargeable to tax” we required to see the following definition.

According to Section 4(1) of Income Tax Act

“Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:”

According to Section 10 of Income Tax Act

“In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—”

From the above definitions we could say that chargeability of Act is governed by section 4 where income tax shall be charged in respect of total income of previous year of every person. However section 10 excludes certain incomes and consequently they would not become part of the total income for the purpose of chargeability of tax as envisioned by section 4.

Accordingly if payment u/s.80D have been made from such income which do not form part of the total income for the purpose of charge of  tax then such payment is said to be out of income not chargeable to tax and not eligible for deduction u/s.80D.

Example:  

  • Payment u/s.80D is made from the Dividend income exempt under Income Tax.
  • Payment u/s.80D is made from the Long Term Capital Gain exempt under Income Tax.
  • Payment u/s.80D is made from the Agriculture income exempt from the Income Tax.

Important Aspect of Section 80D:

Four Types of Payments are eligible.

From F.Y 2014-15, Section 80D provides deduction in respect of following four types of payments:

  • Payment in respect of Health Insurance Premium
  • Payment by way of Contribution to Central Government Health Scheme or other notified scheme
  • Payment in respect of Preventive Health Check up
  • Payment in respect of Medical Expenditure

Who is Eligible for What

  • Maximum deduction during the year available to the individual Assessee is Rs.60000.
  • Only Rs.5000 could be claimed within aggregate limit of Rs.60000 on account of Preventive Health Check-up during the year by the Individual Assessee. No separate limit for category (A) Assessee and his family and category (B) Parents.
  • Deduction in respect of Medical Expenditure is available only to the very senior citizen assessee or member of the family or parents or member of the HUF (Hindu Undivided Family) subject to the condition that any health policy has not been taken on such very senior citizen.

HUF is not eligible for following

  • Deduction by way of Contribution to Central government health scheme or notified scheme is not available to the HUF.
  • Deduction in respect of preventive health check up is not available to the HUF

Cash Payment is not allowed

Since the introduction of section in 1986, deduction has not been allowed for cash payment of   Health Insurance premiums; surprisingly in case of Life Insurance Premiums u/s.80C still cash payments are allowed.  

Out of above four types of payments, relaxation has been given only to the Preventive Health Checkups payment where payment in cash is allowed to the extent of Rs.5000.

Up to 31-3-2007 only cheque mode of payment is allowed to claim deduction however with a view to encourage electronic payments ,Any mode of payments other than cash has been introduced by Finance Act-2007 w.e.f 01/04/2007.

Cash Payment is not allowed

“PREVENTION IS BETTER THAN CURE”

The deduction in respect of payment made for preventive health check up is introduced by Finance Act,2012 w.e.f 1st April ,2012 .

Extract of the memorandum explaining the Finance Bill 2012 is as under:

“It is proposed to amend this section to also include any payment made by an assessee on account of preventive health check-up of self, spouse, dependent children or parents(s) during the previous year as eligible for deduction within the overall limits prescribed in the section. However, the proposed deduction on account of expenditure on preventive health check-up (for self, spouse, dependent children and parents) shall not exceed in the aggregate Rs.5000.”

The word preventive health check-up as such is not defined in the Income tax Act. However relevant meaning of it gathered from various sources is as under:

According to Oxford dictionary

“Preventive” means designed to prevent something from occurring”.

According to Wikipedia

“Preventive healthcare (alternately preventive Medicine or prophylaxis) consists of measures taken for disease prevention, as opposed to disease treatment. Just as health encompasses a variety of physical and mental states, so do disease and disability, which are affected by environmental factors, genetic predisposition, disease agents, and lifestyle choices. Health, disease, and disability are dynamic processes which begin before individuals realize they are affected. Disease prevention relies on anticipatory actions that can be categorized as primal, primary, secondary, and tertiary prevention”

According to Master Guide to Income Tax Act

“In common parlance, it could mean actions taken for examination of the vital functions of the body to ascertain its functioning and/or disorders, so as to prevent any ailment or diseases and ensure physical well-being. Actions contemplate carrying out various tests relating to vital functions of the body, like, examination of blood, heart functioning, liver functioning, kidney functioning, etc. The hospitals and other institutes offer various health checks up programs and facilities, for the purpose. Any expenditure incurred on such health check up should be eligible for the deduction.”

So we can say that payment made for carrying out any medical tests or medical checking with a view to early diagnose of symptoms of any disease or ailment before they converted  in to actual disease and payment made for any measures taken to stay fit and healthy is eligible for deduction as preventive health checkups expenses. Generally following common health issues are screened for during preventive health checkups.

  • Diabetes mellitus (sugar problems)
  • Cholesterol issues
  • Hypertension (high blood pressure)
  • Heart problems
  • Lung problems
  • Kidney problems
  • Liver problems
  • Parasitic infections and other common infections like Tuberculosis
  • Sexually transmitted diseases
  • Eye, ear, nose, throat and dental screening
  • Age appropriate cancer screening
  • Mental health screening and immunization screening, counseling on diet, and healthy lifestyle.

However following points need to be kept in mind while taking deduction for Preventive Health Checkups.

  • Only Rs.5000 could be claimed as deduction on account of Preventive Health Check-up done for assessee, spouse, dependent children and parents’ .No separate limit or per person limit for category (A) Assessee and his family and category (B) Parents.

    (Read Section 80D (2A) together with Memorandum to Finance Bill 2012)

  • Preventive Health Check-up payments can be made in cash.
  • Deduction in respect of Preventive Health Check-up is not available to the HUF.

Children & Parents in the Eyes of Section 80D

According to the explanation to the Section 80D (2)

“For the purposes of clause (a), “family” means the spouse and dependent children of the assessee.”

If Payments pertains to the children then Deduction u/s.80D is available to the assessee only if such children are dependent on the assessee. Here criteria of children being married / unmarried /minor or major need not to be looked upon, only they should not be earning on their own.

However if Payments pertains to the Parents then deduction u/s.80D is available irrespective of the facts that they are dependent on the assessee or independent earning parents.

One interesting point is required to be considered here that Finance Act 2015 has introduced clause ( C) and (d) to Section 80D(2) providing deduction for payment made in respect of Medical Expenditure on the health of any member of the family of the assessee here as family is defined only in respect of Clause (a) of Section 80D(2) and hence We can say that condition of dependent children is not applicable in respect of deduction for Medical Expenditure  but again by inserting proviso to the section 80D(2) Government restricts Medical Expenditure deduction to the very senior citizen only.

Allowability of Medical Expenditure is a Welcome Move.

From 1st April 2015, payment made in respect of medical expenditure is also allowed as deduction u/s.80D. The Objective of Government to include medical expenditure is to give benefit to the very old age people (80 years or more) who do not get any health insurance cover.

According to the Para 23.4 of the Explanatory Notes to the Provisions of Finance Act, 2015

“Further, very senior citizens are often unable to get health insurance coverage and are therefore unable to take tax benefit under section 80D. Accordingly, as a welfare measure towards very senior citizens, section 80D has further been amended to provide that any payment upto Rs.30,000/- made on account of medical expenditure shall be allowed as a deduction under section 80D, in respect of a very senior citizen, if no payment has been made to keep in force an insurance on the health of such person.”

However following points need to be kept in mind while taking deduction for Medical Expenditure.

  • Medical Expenditure has to be paid by any mode other than cash.
  • Assessee or his family member or parents needs to be of 80 years or more.
  • Any health insurance premium has not been paid in respect of such person.
  • Total deduction for Medical Expenditure in respect of Assessee and his family members does not exceed Rs.30000.
  • Deduction is available only to the Individual Resident Indian.

Is Service tax paid on health insurance premium is eligible u/s.80D?

According to the Section 80D(2) the deduction is available in respect of “the whole of the amount paid to effect or to keep in force insurance on the health of the assessee or his family or parents.”

Here the word used is the whole of the amount paid” and hence in simple term whatever amount required to pay to effect or to keep in force an insurance shall be eligible as deduction u/s 80D

Further

The word used is the whole of the amount and not the premium, and hence it can be said that any other amount like service tax, cess apart from amount of premium shall also be eligible as deduction u/s 80D.

Unless you do not pay service tax along with the premium your health insurance policy could not said to be in force or in effect and hence whatever amount paid towards health insurance policy with intention to keep it in force or in effect should be eligible for deduction.

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