TDS was deducted on employee health insurance payout. Can I get a refund ?

1. During the previous financial year, my wife had an emergency caesarean delivery, and the baby was admitted to NICU for 5 days. A bill of ₹74,505 was generated, of which ₹62,833 was approved by the employer. At the time, the hospital had applied for the renewal of income tax exemption status under section 17(2) of The Income Tax Act 1961, read with rule 3A(1) & 3A(2) of Income Tax Rules, 1962, but the certificate was still awaited. Due to this, the sanctioned amount was subject to a tax deducted at source (TDS) of ₹19,604 and only ₹43,220 was credited. However, the hospital has received the tax certificate now with retrospective effect from 1 July 2024. As a result, the employer will not be liable to deduct tax u/s 192 of the Income Tax Act,1961 for such a sum. I wish to avail the refund of this TDS through income-tax return (ITR). 

Can I claim the refund of this TDS? If yes, how to claim the refund as it is not a deduction and the portal only allows to enter exemptions under section 10, which in effect reduces taxable income, and hence tax. But in my case, it is an exemption under section 17, and the portal doesn’t have any option to put this. Should I reduce my income under sections 17(1)/17(2) by ₹62,833 from the amount in Form 16 and report this amount as exempt income? This will most probably trigger an automatic notice. I have also disputed this amount as nontaxable in the annual information statement. I have opted for the new regime, and a friend says that this amount may not be available as an exemption {Section 115BAC 2(iv)}.

Our Response: 

Under the income-tax laws, the value of any benefit or amenities provided by the employer to an employee is taxable as perquisites, subject to prescribed exceptions. 

As per the related provisions, medical reimbursements given by the employer for medical treatment of specified diseases/ailments to employees or their specified families are not considered taxable in the hands of employees, subject to satisfaction of specified conditions. It is assumed that your case falls under the prescribed diseases/ailments, the retrospective approval certificate of the hospital covers the period of treatment, and all other conditions are satisfied. Hence, the reimbursements may be considered as non-taxable. 

 Since the reimbursements were taxed at the withholding stage and a tax was deducted at source by the employer, you may consider the same as non-taxable while filing your income-tax return (ITR) for the FY 2024-25.  

While filing the ITR, you may directly exclude the non-taxable reimbursement amount from the salary reported in Schedule Salary (S) under Section 17(2). As this is a non-taxable reimbursement and not an exempt income, the same may arguably not be reported as an allowance exempt under Section 10 in Schedule S, or in Schedule Exempt Income (EI). 

In case of any queries from the tax authorities (say on account of variance with the salary reported by an employer in Form 16), it will need to be responded, accordingly. You should also retain supporting documents, such as the hospital’s approval certificate and medical bills, to justify the reduced salary reported in the ITR, if required.

Also note that this is a non-taxable reimbursement and does not form part of the specified disallowances under the new tax regime. Hence, the above treatment can be considered irrespective of the tax regime.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.