An employee renewed their parent’s medical insurance for two years, with payment made in May 2024 and coverage from May 2024 to May 2026.
- How should the 80D exemption for this premium be handled in the current tax year (2024-25)? I split the premium amount propertinately. So half in 2024-25 and half in 2025-2026.
- The employee requests to claim the full premium amount as an exemption in this year’s Proof of Investment (POI) and states they will not claim any exemption for the next year.
What is the appropriate course of action in this situation?
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Hi @sacchasona ,
The situation involves the tax treatment of a medical insurance premium paid for two years under Section 80D of the Income Tax Act. Here’s how to handle it:
Key Points:
- Section 80D Exemption: Under Section 80D, taxpayers can claim a deduction for premiums paid for medical insurance for themselves, their spouse, children, or parents. The premium must be paid in the relevant financial year to claim the deduction for that year.
- Prepaid Premiums: If the premium is paid for multiple years in advance, the deduction is allowed only for the portion of the premium that relates to the current financial year. The remaining amount can be claimed in the subsequent years when the coverage applies.
- Proportional Allocation: Since the premium covers two years (May 2024 to May 2026), it should be split proportionately between the two financial years:
- 2024-25: Premium covering May 2024 to March 2025 (11 months).
- 2025-26: Premium covering April 2025 to May 2026 (13 months).
Employee’s Request:
The employee wants to claim the full premium amount in the current year (2024-25) and not claim anything in the next year. However, this is not permissible under tax laws. The deduction must be claimed proportionately based on the coverage period falling within each financial year.
Appropriate Course of Action:
- Explain the Tax Rules: Inform the employee that the Income Tax Act requires the premium to be claimed proportionately for the years covered. The full amount cannot be claimed in one year.
- Allocate the Premium Proportionately:
- Calculate the premium amount attributable to each financial year based on the coverage period.
- For example, if the total premium is ₹24,000:
- 2024-25: ₹24,000 × (11/24) = ₹11,000 (for 11 months).
- 2025-26: ₹24,000 × (13/24) = ₹13,000 (for 13 months).
- Claim the Deduction Accordingly:
- In the Proof of Investment (POI) for 2024-25, claim ₹11,000 under Section 80D.
- In the next financial year (2025-26), the employee can claim ₹13,000.
- Documentation: Ensure the employee submits the insurance premium receipt and a breakdown of the allocation for both years.
Why This Approach?
- Compliance: This ensures compliance with tax laws and avoids potential disallowance of the deduction during tax assessment.
- Fairness: It aligns with the principle that deductions should match the period of coverage.
If the employee insists on claiming the full amount in one year, explain that this could lead to issues during tax scrutiny and potential penalties. It’s important to follow the rules to avoid future complications.
Sandeep
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