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Companies across the globe constantly tussle to hire the best people because employees are the pillars of an organisation. And, they help accelerate organisational growth.
To attract the best employees, employers provide best-in-class benefits along with competitive pay. These benefits include paid vacations, team outings, non-monetary gifts, etc. While these benefits may be extraordinary, employers can leverage some basic benefits like adequate health insurance coverage to employees.
Offering health insurance will build a sense of safety among employees and will keep them motivated towards achieving long-term business goals. But, often employers and employees are confused about the tax implications of group health insurance.
Most of them try to relate it to Section 80D of the Income Tax Act – Deduction for health insurance premium paid. And, that’s not completely wrong! ?
Let’s start with understanding the applicability of Section 80D and the tax benefits of group health insurance for employers and employees.
Decoding Section 80D – Deduction for health insurance premium
Section 80D of the Income Tax Act provides tax deduction for health insurance premium paid by individuals.
An individual can claim a deduction of Rs 25,000 for insurance premium paid for self, spouse and dependent children.
Also, they can claim an additional deduction for parents’ health insurance up to Rs 25,000 if the parents are less than 60 years of age. For parents aged more than 60 years, the deduction benefit increases to Rs 50,000.
In case, both individual and parents are 60 years or above, the maximum deduction available under this section is up to Rs 1 lakh.
Tax benefits of group health insurance for employers
If the employer pays the whole premium on behalf of employees, employers are allowed to claim the entire premium amount and avail tax benefit.
According to the Income Tax Act, any amount paid by the employers for the employees’ benefit will be treated as ‘Profit in lieu of salary’. In this situation, the health insurance premium amount is defined as ‘Profit in lieu of salary’.
To simplify, the premium paid for group health insurance policies is a benefit offered to the employees and can be used to get a tax benefit. The entire amount of premium can be claimed as a business expense in their Profit & Loss account. Click To Tweet
The premium amount is often categorised under general business expenses. The tax benefits can be enjoyed by different business types: sole proprietorship, partnership firms, companies (public or private), etc.
Tax benefits of group health insurance for employees
Let’s analyse the tax benefits of group health insurance premium on employees under different scenarios.
Scenario 1 – When an employee bears a partial amount of the insurance premium
In this situation, the employee can use the amount paid by them to get a tax deduction under section 80D of the Income Tax Act. However, the tax benefit should not exceed Rs 1 lakh in a financial year.
Scenario 2 – When an employee bears the entire insurance premium
The employee can claim the entire amount as tax deduction under Section 80D provided the amount does not exceed the maximum deduction of Rs 1 lakh.
Scenario 3 – Where the employer pays the entire insurance premium
The employee cannot claim any tax benefit for the premium amount paid by their employer on behalf of them.
We hope this explanation clears the tax benefits of group health insurance on employers as well as employees.
RazorpayX Payroll’s group health insurance – The best choice
India’s best payroll software for SMEs – RazorpayX Payroll now offers best-in-class group health insurance. It has partnered with a leading insurance company to provide affordable health insurance to businesses, even with an employee strength of 2.
The software provides businesses with customised insurance cover at economical premiums. These covers include pre-existing conditions, COVID-19 and maternity cover from day 1.
Since RazorpayX Payroll manages the employee database for executing payroll, it manages and updates employee information with the insurance provider automatically.
Businesses get a 360-degree solution to process and execute payroll and group insurance cover with RazorpayX Payroll. The software reduces manual hours and provides comprehensive features of payroll processing at affordable pricing.
Try it to believe it!