HUMAN TOUCH IN THE INCOME-TAX ACT Medical Expenses, Tax Relief and the New Tax Regime
Medical expenses, like food, shelter and education, have become an unavoidable part of modern life. With rising healthcare costs, expensive medical procedures and increasing insurance premiums, medical expenditure can place a considerable burden on family finances. Recognizing this reality, the Income-tax Act has traditionally provided certain deductions for health insurance, medical treatment and disability-related expenses.
However, the introduction of the new tax regime has changed the tax-planning landscape. Several deductions that taxpayers once routinely claimed are no longer available under the default regime. Does this mean that the Income-tax Act has lost its human touch? Not entirely! These relief provisions continue to exist, but their availability now depends largely on the tax regime selected.
1. Medical deductions and the new tax regime:
Under section 202 of the Income-tax Act, 2025, deductions under Chapter VIII are generally not available under the default tax regime, except for specifically permitted deductions. Consequently, deductions relating to health insurance, medical treatment of disabled dependants, specified diseases and the taxpayer’s own disability cannot ordinarily be claimed under this regime. These benefits continue to be available under the alternative old tax regime, subject to prescribed conditions. Taxpayers with substantial medical expenditure or insurance premiums should therefore compare their tax liability under both regimes before making a choice. The deductions have not disappeared from the law; their availability is now linked to the tax regime.
2. Health insurance and medical expenditure – Section 126:
Section 126 provides deductions for eligible health insurance premiums and specified medical expenditure. The principal limits are:
• Self, spouse and dependent children: Up to ₹25,000 towards eligible health insurance premium.
• Parents: An additional deduction up to ₹25,000.
• Senior citizens: The applicable limit can increase to ₹50,000.
• Medical expenditure: Specified expenditure on a senior citizen not covered by health insurance may also qualify, subject to conditions.
• Preventive health check-up: Up to ₹5,000, within the overall prescribed limits.
Cash payment is permitted for preventive health check-ups; other eligible payments must generally be made through non-cash modes.
3. Medical treatment of a disabled dependant – Section 127:
Section 127 provides a fixed deduction to an individual or HUF for expenditure on the medical treatment, training and rehabilitation of a dependant with disability, or contributions to an eligible scheme for the dependant’s maintenance. The deduction is ₹75,000 for a dependant with disability and ₹1,25,000 for severe disability. It is a fixed deduction and is not dependent on actual expenditure, provided the statutory conditions are satisfied.
Eligible disabilities include blindness, low vision, hearing impairment, locomotor disability, intellectual disability, mental illness, autism spectrum disorder, cerebral palsy and multiple disabilities, as recognised under applicable law. Generally, disability of at least 40% qualifies as disability, while 80% or more constitutes severe disability. For an individual, a dependant may include a spouse, children, parents, brothers and sisters; for an HUF, it may include a member of the HUF. The dependant must be wholly or mainly dependent on the taxpayer and must not have claimed the corresponding deduction for his or her own disability. Prescribed medical certification is also necessary.
4. Deduction for the taxpayer’s own disability – Section 154:
Where the taxpayer suffers from a disability personally, section 154 provides a fixed deduction of ₹75,000, increasing to ₹1,25,000 in the case of severe disability. The deduction is not linked to actual medical expenditure but is subject to prescribed medical certification and other statutory conditions. The distinction is important: section 127 provides relief to a taxpayer maintaining a disabled dependant, whereas section 154 provides relief to an eligible taxpayer with disability.
5. Treatment of specified diseases – Section 128:
Section 128 provides a deduction for actual expenditure incurred by a resident individual or HUF on the treatment of specified diseases or ailments prescribed under the Rules. The deduction is restricted to the lower of actual eligible expenditure or ₹40,000. For a senior citizen, the ceiling is ₹1,00,000. The benefit is available for treatment of the taxpayer or an eligible dependant, and in the case of an HUF, a member of the HUF. The prescribed medical prescription must be obtained, and any amount reimbursed by an insurer or employer must be reduced from the eligible expenditure. Specified diseases include certain neurological disorders, malignant cancers, AIDS and chronic renal failure, subject to the prescribed conditions. Every serious illness or expensive medical procedure does not automatically qualify. For example, knee replacement or bypass surgery does not become eligible merely because it involves substantial expenditure; the underlying disease must fall within the prescribed list. The Government should periodically review this list to reflect changing medical needs and treatment costs.
Conclusion: Has the human touch disappeared?
The Income-tax Act, 2025 continues to recognize the financial burden of medical expenditure by retaining deductions for health insurance, disability and specified diseases. However, these deductions are not available unnder the default new tax regime.
Although salaried taxpayers and others without business or professional income generally enjoy the flexibility of choosing between the two tax regimes every year, taxpayers having business or professional income face restrictions on switching regimes. More importantly, even for salaried taxpayers, the concessional tax rates and revised slab structure under the new regime may make the old regime less attractive, despite the availability of medical deductions. Thus, merely retaining these deductions under the alternative regime does not necessarily ensure meaningful tax relief for all categories of taxpayers.
Medical expenditure is not a voluntary tax-saving investment; it is often an unavoidable financial burden arising from illness, disability or medical emergencies. A taxpayer who spends on health insurance or bears the cost of medical treatment should receive some recognition under the tax law. After all, two taxpayers earning identical incomes may have entirely different financial commitments if one has to bear substantial medical expenses while the other does not.
The better approach would therefore be to allow reasonable deductions towards health insurance and specified medical treatment even under the default new tax regime. This would provide targeted relief to taxpayers who actually incur such expenditure, without disturbing the broader objective of tax simplification.
Tax simplification is welcome, but medical hardship should not become a casualty of tax simplification!
