Understanding The Tax Implications Of Group Health Insurance

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Tax Implications Of Group Health Insurance

At Plum, we’ve often come across many prospects and clients who’ve asked us about the tax implications of the group health insurance plans they buy for their employees. While addressing that question, we realized that most people try to understand the tax implications of health insurance based on Section 80D of the Income Tax Act.

And that’s where the confusion begins. Let’s first understand what this section states:

Deduction based on Section 80D of the Income Tax Act:

Section 80D of the Income Tax Act covers tax deductions based on Health Insurance Premiums Paid. This act states the amount an individual can claim as a tax deduction for paying the premium for health insurance for themselves and their families.

It has two primary clauses for health insurance premiums:

  • You can claim a tax deduction of up to ₹25,000 per year for any instalments you pay as health insurance premiums. The premium should be for you, your spouse, and your dependent children.
  • Any premium paid for guardians/parents is additionally qualified for deduction up to ₹25,000 every financial year. So you get another ₹25,000 deduction if you include your parents in the health insurance.

Both of these clauses mention nothing about any tax implications related to group health insurance. And that’s why most employers get confused about what paying premiums for their employees’ health insurance would mean for them.

So, let’s return to the point, what are the tax implications of group health insurance?

Tax Implications Of Group Health Insurance For Employers

For this, you have to look into Section 17 of the Income Tax Act, which defines “Salary”, “perquisite”, and “profits instead of salary” for employers. The health insurance premium employers pay defined as a ‘profit in lieu of salary”. In simpler words, the health insurance premium you pay becomes a part of the fringe benefits you provide, which are considered a business expense. As a result, you don’t have to pay any tax on this amount.

Tax Implications Of Group Health Insurance For Employees

If you, as an employer, bear the entire cost of the health insurance premium for your employees, then your employees are not entitled to claim any tax deductions. However, if your employees are paying a part of the premium, they can get some deduction based on their pay.

We hope this makes the difference between tax implications for health insurance and group health insurance clear.

To summarize:

  • If you, as an employer, are bearing the cost of the premium, then it is a fringe benefit for the employee as per Section 17, and you can claim it as an expenditure with no limit on the premium paid.
  • If your employee bears some premium cost, they can benefit from the deduction as per Section 80 D.

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