A fixed medical allowance in your salary is fully taxable, with no exemption and no bill needed. The Rs 15,000 tax-free medical reimbursement that older salary structures relied on ended with FY 2017-18. Tax-free medical benefits still exist, but only as employer-paid treatment or perquisite exceptions and insurance, a different thing from a cash allowance.

Allowance, reimbursement and insurance

The three get mixed up in offer letters, and they are taxed differently.

• Medical allowance: a fixed monthly amount, taxed as salary in both regimes. Nothing you spend on doctors changes that.
• Medical reimbursement: the employer repays bills. It is generally tax-free only where the perquisite rules carve it out, for example treatment in a government or local authority hospital, in a hospital approved for the purpose, or for prescribed serious diseases in an approved hospital. Outside those cases the reimbursement is a taxable perquisite.
• Employer-paid health insurance: premiums paid by the employer on a group policy are not a taxable perquisite for the employee.

The Income-tax Rules, 2026 are reported to have changed some medical-benefit thresholds for FY 2026-27, so check the current perquisite valuation position before restructuring. These carve-outs sit in the perquisite rules, not the allowance rules, which is why they hold for both tax regimes. What changes by regime is the employee’s own premium: Section 80D works only in the old regime.

Why employers still pay it

A cash medical line was a common way to dress up a CTC, since it looked like a benefit but cost the same as special allowance. Many employers now swap it for group health insurance, which gives real cover and is tax free to the employee. Workers who fall under ESI already receive medical care under the scheme, so a separate medical allowance on top is usually unnecessary for them. If you are building the structure, test it in the Salary Breakup Calculator.

Frequently asked questions

Is medical allowance exempt if I submit bills?

No. A fixed medical allowance is taxable even with bills. To get tax-free treatment the arrangement has to be a real reimbursement of the specific expense that falls within the perquisite exceptions.

Does the standard deduction cover the old Rs 15,000 exemption?

It was introduced in FY 2018-19 in place of that exemption and the transport allowance exemption. See standard deduction for the current amounts.

Is employer-paid health insurance for parents tax free?

Group policy premiums paid by the employer are not taxed as a perquisite. Whether the plan can cover parents depends on the policy design, which is a benefits question, not a tax one.

Check where medical items land in the pay structure with the CTC to In-Hand Salary Calculator.