How does time off for a serious illness affect funding and duration of PhD? I am a PhD student from India studying in the UK and I have been diagnosed with Hepatitis B during my recent visit to India. The sad part is that it is a recurrence of the disease as I contracted it before my PhD and had to delay my PhD for a few months in the beginning. 

Now that I have been diagnosed with it again, I'm afraid of telling my supervisor and sponsors about it as I feel they might cancel the funding as I have such a recurrent problem. 

I say this because my project is funded by a German company who are a stickler for time and want me to finish my work on time as there have been enough delays. 

I also took 2 months off in the summer to work on a separate research project outside of my PhD to build experience. It was not taken nicely by the company but I went anyway as I had a very good first year viva and report. I took it with the thought that I would make up the time by working extra once I get back and my supervisor supported me in this regard. Plus, UK PhD students are allowed 6-8 weeks off during their PhD for holidays and I haven't taken any time off since except to visit India for a conference, which has led to my predicament. 

I feel completely lost and I do not know what to do.

What I exactly want to know is, If its normal for PhD students to take time off for illnesses? Can sponsors withdraw funding in that event? How does it affect the time of the PhD?
I'm at Simon Fraser University in Canada, but I've recently been dealing with this issue as I'm involved with our grad student association, so I wanted to respond to your question. If you don't change your registration status in any way, your semesters will almost certainly count against you in every way imaginable -- everyone thinks you're making progress and there is nothing to say otherwise. You should look into your university's 'on leave' policy, as that will be the formal mechanism that allows other allowances to take place. Here, leave for medical reasons will require going through your supervisor (and in turn, a faculty committee), but is essentially always granted, so I hope that works the same where you are.

Unfortunately, funding entities likely have their own, probably very specific, rules, so it's unlikely any general advice would cover them.

Ultimately, I highly recommend taking formal leave (i.e. changing your registration status), because various negative effects will likely accrue otherwise.