Tax Benefits of Group Health Insurance for Employers and Employees

Group Health Insurance

Group health insurance, also known as employee health insurance, provides medical benefits to a group of people, such as employees of an organisation. Businesses use group health insurance to extend healthcare benefits to their employees under a single umbrella plan – even if they have as few as 3 to 10 employees.

In fact, group health insurance is more suited for small and medium enterprises and microenterprises. It supports employees’ well-being while also qualifying for some tax deductions. Think of this as a win-win situation for employers and employees.

On that note, this blog discusses how businesses can reduce their tax liability while also granting medical coverage to their workforce.

Also read: Group Health Insurance: A Business Guide

What is Group Health Insurance?

Group health insurance is a type of shared-risk health insurance policy designed to offer medical health coverage to a group of individuals. This includes collectives like housing societies, professional associations, etc.

Typically, businesses use it to cover the medical and healthcare expenses, such as hospitalisation charges, medical treatment, ambulance charges, etc., of their employees.

Its objective is to offer accessible and comprehensive healthcare during medical emergencies. In some cases, this group health insurance may also cover employees’ families and dependents, such as their spouses, kids, parents, parents-in-laws etc.

Is Group Health Insurance Tax Deductible?

Yes, group health insurance premiums are tax-deductible as they can be claimed as a business expense under Section 37 of the Income Tax Act of 1961. This reduces the company’s taxable income and lowers its tax liability.

On the other hand, employers can seek tax deductions of up to Rs.25,000/year for self, spouse, children and dependent parents and Rs. 50,000/ year if parents are senior citizens under section 80D of the Income Tax Act, 1961. Do note that this deduction is purely for their contributions, if any, towards any health insurance premiums that they may pay out-of-pocket in addition to the premiums paid by their company.

These are just the monetary tax benefits of group health insurance. It also benefits employers and employees in several ways, which we’ll explore in the subsequent sections.

Suggested read: Group Health Insurance Benefits

What Are the Tax Benefits of Group Health Insurance for Employers?

Claiming tax deductions is just one of the many benefits for employers looking to purchase group health insurance for their employees. But there’s more to these direct tax benefits.

Let’s explore the various benefits of deductions and exemptions on the payment of health insurance premium amounts by employers:

1. Tax Deduction u/s 37 of the Income Tax Act

Section 37(1) of the Income Tax Act allows for tax deduction of business expenses incurred solely and entirely for business operations. As such, employers can claim the premiums paid as a business expense under this section. 

The Government of India and the Insurance Regulatory and Development Authority of India (IRDAI) made group health insurance mandatory in 2020 after the COVID-19 pandemic, so it will be considered a legitimate expense for safeguarding and welfare of employees.

2. Reduction in Taxable Income

Paying off the group health insurance premium reduces the taxable profit of the company. Doing so lowers the company’s taxable income and shrinks the tax liability. This introduces liquidity in business cash flow, which can be redirected for other growth.

3. No Fringe Benefits Tax (FBT)

Since group health insurance is offered for the welfare of employees, it is not considered a fringe benefit. This means that employers do not have to pay any additional tax on such benefits, allowing companies to provide healthcare benefits to employees minus the associated tax burden.

Quick read: Top 8 Key Features of Group Health Insurance

What Are Some Non-Tax Benefits of Group Health Insurance for Employers?

As mentioned previously, the tax benefits of group health insurance are diverse and go beyond financial gain. To illustrate this, here’s an overview of the key benefits of offering group health insurance to employees:

1. Comprehensive Healthcare Support

By purchasing a group health insurance policy, you’re offering your employees access to affordable healthcare. Whether it’s through preventive healthcare or covering hospitalisation costs, it is a tool to offer financial protection to your employees and their families during medical emergencies.

2. Talent Retention and Acquisition

3. Reduced Absenteeism

Granting timely access to medical care ensures that employees (and their dependents) have timely access to medical care. This reduces the number of days employees may miss work due to medical issues. Further, preventive healthcare contributes to their general well-being and fitness, which further reduces absenteeism.

4. Increased Productivity

Healthy employees are far more energetic, productive, and engaged—both inside and outside of work. As such, group health insurance contributes to higher productivity via preventive and curative care.

5. Employer Advocacy

Employers that offer health insurance would naturally be viewed favourably by their employees. This helps with talent acquisition and retention and enhances employer advocacy.

6. Cost Savings

In addition to the tax benefits, group health insurance works out to be more affordable than individual health insurance policies. The larger the group, the lower premiums employers and employees will have to pay, thus saving them money.

Offering group health insurance also has a positive impact on a company’s long-term health, growth, and sustainability.

For instance, preventive healthcare services available through health insurance reduce the chances of serious illness, lowering future healthcare costs for employers and employees. Similarly, investing in your workforce and their well-being promotes goodwill and creates a brand for your organisation as an employer, which helps cultivate deep and meaningful relationships with employees.

Also read: Difference Between Group and Individual Health Insurance

What Are the Tax Benefits of Group Health Insurance for Employees?

The tax benefit of group health insurance extends to employees as well. It primarily arises from the Section 80D of the Income Tax Act, 1961, which permits an individual to claim a tax deduction on health insurance premiums. Just like it does in the case of companies, it reduces the individual’s taxable income and corresponding tax liability.

To understand this point, consider these three common scenarios:

Case 1: Employer Pays the Entire Insurance Premium

In this case, the employer pays the full insurance premium for the group insurance policy. The employee does not contribute anything to the premium paid.

Tax implication: Since the employee has not paid any premium, they cannot claim any insurance tax benefits under Section 80D. That said, the employer can, however, claim deductions for the premiums as business expenses.

Case 2: The Premium Amount is Split Between Employer and Employee

In this example, the employer pays a part of the premium, whereas the employee pays the remaining premium amount.

Tax implication: The employee can claim a deduction under section 80D only for the portion they contribute towards the insurance premium. This value is presently capped at Rs.25,000/year for self, spouse, and dependent children and Rs.50,000 for family if parents are senior citizens.

Case 3: Employer Offers Basic Cover and Employee Purchases Top-Up

In some cases, the employer may offer basic health coverage, whereas the employee may be looking for something more comprehensive. In such a situation, the employee can increase coverage by purchasing a top-up plan or an add-on cover for specific medical conditions, critical illnesses, etc. Here, they’ll have to pay the premium of the top-up.

Tax implication: The employee can claim tax deductions for the insurance premium paid towards additional or top-up policies. The limit of Rs. 25,000/year for self, spouse, and dependent children and Rs. 50,000 for family if parents are senior citizens continues to apply here as well.

Also read: Group Health Insurance for Small Business

What are Some Non-Tax Benefits of Group Health Insurance for Employees?

In addition to the tax benefit outlined above, there are also some non-tax benefits for employees that can come in the form of savings and mental peace. These include:

1. Accessible Healthcare

Typically, a group mediclaim policy effectively results in no-cost health coverage. The premium amount is reduced to the extent that most employers bear these costs without passing them on to employees. This grants them access to health coverage without the financial burden of purchasing individual policies.

2. Protection from Medical Expenses

A group health insurance policy covers almost all medical-related expenses, such as preventive healthcare checkups, ambulance charges, consultation fees, etc. It also offers discounts on medicines and lab tests, significantly reducing the out-of-pocket expenses related to ongoing treatments and routine checkups.

3. No Waiting Period for Pre-Existing Diseases

Individual health insurance plans often have a waiting period of 2-4 years to cover pre-existing health conditions. In contrast, group health insurance offers coverage for these from day one. It is particularly useful for those managing chronic health conditions as they can seek treatment without delays.

4. Policy Customisations

Even if the employer’s group health insurance policy offers basic coverage, employees can customise it on their own dime. Add-ons to cover critical illnesses, top-ups to expand coverage, or the inclusion of dependents at nominal costs are just some ways to tailor the policy to meet individual requirements.

Buy Group Health Insurance from Onsurity

Onsurity takes the hassle out of selecting the right group health insurance that balances tax benefits with employee well-being.

The smooth enrollment process onboards businesses of all shapes and sizes and equips them with the tools necessary to offer healthcare coverage to employees. At the same time, our experts ensure that you do not miss out on any tax benefits.

Conclusion

Equipping your employees with group health insurance coverage isn’t just about their welfare but is also a smart financial decision. Understanding the tax savings for employers and employees maximises financial prudence while balancing it with a thriving environment for growth and well-being.

Explore how Onsurity helps invest in your employees’ health while making your business more tax-efficient by scheduling a demo today!

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