Uploaded images not showing on WP 4.3 subdomain multisite

Problem: Uploaded images are not being shown in posts and pages. Upload is successful. But the thumbnail shown after upload is over shows a broken image icon. When the published page is viewed, the image is missing. When the image is displayed through the url on the page https://myurl/files/2015/09/service-matters-header.png, it does not show. However when the full url is shown https://service.drjoel.in/wp-content/blogs.dir/8/files/2015/09/service-matters-header.png, it displays properly.

Details about my system:
Debian 8.2 VPS running apache2 webserver
Wordpress Multisite (subdomain)

I suspected this to be a .htaccess issue. I tried the following variations of .htaccess in my webfolder, but the effects continue:

Original:

<ifModule mod_headers.c>
Header set X-XSS-Protection "1; mode=block"
Header always append X-Frame-Options SAMEORIGIN
Header set X-Content-Type-Options: "nosniff”
</ifModule>

RewriteEngine On

RewriteBase /
RewriteRule ^index\.php$ - [L]

# uploaded files
RewriteRule ^files/(.+) wp-includes/ms-files.php?file=$1 [L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule . index.php [L]

Other:

# BEGIN WordPress
RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]

# uploaded files
RewriteRule ^files/(.+) wp-includes/ms-files.php?file=$1 [L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule . index.php [L]
# END WordPress

And

RewriteEngine On
RewriteBase /
RewriteRule ^index\.php$ - [L]

# add a trailing slash to /wp-admin
RewriteRule ^wp-admin$ wp-admin/ [R=301,L]

RewriteCond %{REQUEST_FILENAME} -f [OR]
RewriteCond %{REQUEST_FILENAME} -d
RewriteRule ^ - [L]
RewriteRule ^(wp-(content|admin|includes).*) $1 [L]
RewriteRule ^(.*\.php)$ wp/$1 [L]
RewriteRule . index.php [L]

What could be wrong?