Understanding The Tax Implications Of Group Health Insurance

At Plum, we’ve often come across a lot of prospects and clients who’ve asked us about the tax implications of the group health insurance plans that 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 details about 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 up to ₹25,000 per year for any installments you pay as health insurance premiums. The premium should be for you, your spouse, and 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 too in the health insurance. 

Clearly, 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 come back 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 in lieu of salary” for employers. In it, the health insurance premium that employers pay is defined as a ‘profit in lieu of salary”. In simpler words, the health insurance premium that you pay becomes a part of the fringe benefits that you provide and they are considered as 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 is bearing the entire cost of the health insurance premium for your employees, then your employees are not entitled to claim any tax deductions on it. However, if your employees are paying a part of the premium, then they can get some deduction based on the amount they 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 amount of premium paid. 
  • If your employee is bearing some cost of the premium, then they can claim the benefit of the deduction as per Section 80 D.