If you are one of those undergoing expensive medical treatment in an "approved" hospital and your employer is picking up the tab, you can sit back and relax. Your employer will have to pay  fringe benefit tax  (FBT) on 20% of the total expenses. You will be spared of paying tax even if the bill exceeds Rs 15,000.

The news comes as a relief for employees as the CBDT's circular is silent on the FBT liability on companies footing the bill for medical treatment of their employees in "approved" hospitals. The circular only refers to the tax liability on reimbursement of medical expenses incurred by an employee in "unapproved" hospitals. In such cases, the employer has to pay FBT if the amount is below Rs 15,000 a year and the employee has to pay tax if the amount exceeds Rs 15,000 a year.

"Employers will be liable to fork out FBT if they pay for the actual expenses incurred by their employee for treatment of a prescribed disease in a hospital approved by tax authorities," clarified a senior government official. The tax authority in this case is the Chief Commissioner of Income Tax.

If you undergo, say a heart surgery in Escorts, which costs Rs 3 lakh, your employer will be liable to pay FBT if he foots this bill. The levy will be charged on the employer if heart surgery falls under the category of "prescribed" disease and Escorts is an approved hospital. In this case the FBT liability would work out to Rs 18,000.

 The logic of levying FBT is that reimbursement of medical expenses in approved hospitals is not a "perquisite" under Section 17(2) of the Income Tax Act. This means the employee is not liable to pay tax on such an expense, even if it exceeds Rs 15,000.

With the latest clarification, there are three scenarios on the tax liability on medical reimbursements to employees. First, the employee is reimbursed expenses up to Rs 15,000 a year for treatment in an "unapproved" hospital. He will not be liable to pay tax because the sum (up to Rs 15,000) does not fall within the meaning of "salary" as defined in the provisions of the I-T Act. The employer will, however, have to pay FBT.

Second, an employee is reimbursed over Rs 15,000 a year for treatment in an unapproved hospital. In this case, the employee is liable to pay tax because expenses above this threshold are treated as a perquisite. The CBDT circular has already said that there would be no change in this position.