Is medical reimbursement taxable?

     Print Edition: January 24, 2008

My company gives me medical reimbursement. I recently filed a claim of Rs 20,000 for my mother’s hospitalisation. But my company says that I have exceeded income tax limit and the reimbursement amount will be taxable.

Umesh K Iyer

Medical reimbursement of over Rs 15,000 is taxable in the hands of an employee. So the excess amount reimbursed to you shall be included in your salary income for calculating tax. You may consider taking a health insurance policy for your mother.

The premium paid for medical insurance is allowed as deduction under Section 80D up to Rs 15,000. The receipt of insurance claim amount is not taxable.

I am a government school teacher and get 30 days earned leave every year. I have been working for the past 20 years.Will I be taxed if I encash my leave?

Chetan C

There is no income tax exemption available if you encash your earned leave during your service period. The amount of earned leave encashed by you will be taxed as salary income in your hands. Tax exemption is available only when you encash your earned leave at the time of retirement, subject to certain conditions. The maximum exemption limit is Rs 3 lakh.

The total amount of earned leave is calculated by taking 30 days earned leave for every one year of completed service and multiplied by the total service period. The method to calculate the amount of encashment is very simple. The average salary drawn by the employee during the preceding 10 months is used as the base for calculating the amount due to him.

My father is retiring in January 2008. Please tell me the taxability of pension and commuted pension received. Also, my mother’s LIC pension policy has matured. Can she commute some portion of the pension? Will it be taxable?

Akshay Sharma

In your father’s case, pension received by him after his retirement is taxable under the head of salaries. Commuted value of pension is exempted under Section 10(10A) of the Income Tax Act and the amount of exemption depends on whether your father has received gratuity or not at the time of retirement.

In case your father receives gratuity, commuted value of one-third of the pension will be exempt from tax. In case of non-receipt of gratuity, commuted value of half of the pension will be exempt from tax and the balance of commuted pension will become taxable.

In your mother’s case, she can commute some portion of pension from LIC. Payment received in commutation of pension from a fund set up by LIC or any other approved insurer is fully exempt from tax. Since pension received from LIC is not received from any employer, it is taxable under the head “income from other sources”.

I am a housewife but I started giving music classes from June 2007. I earn around Rs 9,000 a month. Do I need to file my return of income?

Akash Malik

The basic tax exemption limit for females is Rs 1.45 lakh a year. Your earning for the financial year 2007-8 will be approximately Rs 90,000, which is below taxable limit.

Therefore, it is not mandatory for you to file income tax return. However, it is advisable that you open a bank account to deposit your earnings. When your income increases and is more than the basic exemption limit, you can apply for your permanent account number and file your return.

I purchased units of a mutual fund in August 2005 and redeemed some of the units in June 2007. I again purchased some units in June 2007 but sold them in November 2007. I have paid securities transaction tax (STT) on these transactions. How is tax calculated? Do I need to add the profit to my income and then calculate tax?

Lokesh Kumar

No tax is payable for the units of the mutual fund that you sold in June 2007 since you had retained the units for more than one year. The profit from them will be termed as long-term capital gain and will be exempt from tax. But the units that you redeemed in November 2007 were held by you for less than one year.

The capital gains generated on their sale will be termed as short-term capital gain and taxed at a flat rate of 10% since you have already paid STT. Once tax is calculated at a special rate on any particular income, it is treated separately from the other income of the assessee.

The other incomes will be taxed at normal rate as applicable to the assessee. Hence in your case, for computing the income tax, short-term capital gain shall be excluded from the total income. Normal rates of tax will be applicable on the rest of the income.

I have recently joined my first job. I will be given a house rent allowance (HRA) of Rs 4,000 a month. I am sharing an apartment and paying Rs 3,000. Please tell me the taxability of my HRA. My basic pay is Rs 6,000.

Ram Prasad Sharma

The amount of HRA exemption is calculated as the least of the following three:
• 50% of basic salary in case of metros and 40% for other cities
• Actual HRA received
• Actual rent paid minus 10% of basic salary

As you are living in a rented accommodation, you are eligible for deduction under section 10(13A) of the Income Tax Act. The least figure in your case shall be actual rent paid minus 10% of the basic salary. Since you pay a rent of Rs 3,000 and 10% of your salary comes to Rs 600, the least figure will be Rs 3,000 minus Rs 600 which comes to Rs 2,400. The balance Rs 1,600 of the HRA will be taxable.

My son was admitted to a play school in June 2007. I paid a one-time fee of Rs 25,000, monthly fees of Rs 1,500 and transport fee of Rs 300 a month. Can I avail Section 80C benefits for these expenses?

Ashvinder Singh

No, you can not claim deduction for the tuition fees paid to a play school. Under Section 80C, tuition fees (excluding development fees, donations or other payments of similar nature) paid for full-time education of any two children of an individual will qualify for deduction. The tuition fee should be paid to a university, college, school or other educational institutions in India.

Play schools are not considered educational institutions for the purpose of claiming this deduction. Consequently the fees cannot be called tuition fees.

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