Explanation
The MEDIAN function has no built-in way to apply criteria. Given a range, it will return the MEDIAN (middle) number in that range.
To apply criteria, we use the IF function inside MEDIAN to "filter" values. In this example, the IF function filters by group like this:
IF(group=E5,data)
This expression compares each value in the named range "group" against the value in E5 ("A"). Because the criteria is applied to an array with multiple values, the result is an array of TRUE FALSE values like this:
{TRUE;TRUE;TRUE;TRUE;TRUE;FALSE;FALSE;FALSE;FALSE;FALSE}
In this array each TRUE corresponds to a value in group A. The IF function evaluates these results and returns the corresponding value from the named range "data". The final result from IF is
{1;2;3;3;5;FALSE;FALSE;FALSE;FALSE;FALSE}
Notice only values in group A have survived, and group B values are now FALSE. This array is returned to the MEDIAN function, which automatically ignores FALSE values and returns median value, 3.
Note: when IF is used this way to filter values with an array operation, the formula must be entered with control + shift + enter.
Additional criteria
To apply more than one criteria, you can nest another IF inside the first IF:
{=MEDIAN(IF(criteria1,IF(criteria2,data)))}
To avoid extra nesting, you can also use boolean logic in the criteria.