Understanding Tax Implications in Group Health Insurance

While finding the right talent can be an arduous process for employers, retaining talented employees can be equally challenging. To achieve this, employers today seek to provide amazing career opportunities, resources to grow, multiple benefits, and competitive pay. Amongst the tried and tested ways of doing so, most employers ensure they offer benefits in the form of a comprehensive group health insurance plan. Offering group health insurance to employees builds a sense of psychological safety at the time of medical emergencies and also keeps them motivated.

While the employee enjoys various advantages from a group health plan, the benefits are extended to the employers as well, one of them being tax concessions. If a group health insurance plan adds up to the overall monetary benefit of the organization, it just gets better.

Taxation involved in group health insurance policies can feel like a complicated topic to explore. To begin with, are there tax deductions on group health insurance premiums? The answer is "yes". Tax benefits apply to the premiums paid by companies (or their employees) under the Income Tax Act.

Tax benefit for employers:

In most group health insurance plans, the employer pays the premium and passes the benefit on to the employee. So, if the employer pays the entire premium amount, the company becomes eligible to claim the whole premium amount and avail tax benefits. How, you may ask? As per Section 17 of the Income Tax Act, the group health insurance premium that employers pay is referred to as a "profit in lieu of salary". This means that the group health insurance premium becomes a part of the benefits that the employer provides. The employer's share of the premium is considered a business expense and, therefore, doesn't count as a taxable amount.

Tax benefit for employees:

If the employee pays a portion or complete premium, he or she will be entitled to tax benefits up to the amount of his or her premium contribution. Section 80D of the Income Tax Act provides a tax deduction for health insurance premiums paid by individuals. Group insurance premiums can also be included as a part of this section. Under this section, an individual employee can claim a deduction of Rs 25,000 for insurance premiums paid, which includes the employee himself/herself, the spouse, and dependent children. The tax benefit, however, should not exceed Rs 1,00,000 in a financial year. For example, an employee avails the benefit of section 80D when he/she pays premiums for individual health insurance for himself/herself and family members. However, in many cases, the limit is not fully utilized. Simultaneously, if the employer offers group health insurance and the employee pays 50% of the premium amount, he/she can now add this premium contribution to the existing tax benefit under section 80D.

For a better understanding, let us look at the following three scenarios and their respective tax implications.

As a Human Resource manager, making an informed decision on investing in a comprehensive group health insurance plan is crucial. It helps reduce the cost of healthcare and increases the company's productivity. It also provides peace of mind for employees in case of an unforeseen event and, at the same time, builds trust with the organization that they serve.