Income Tax

Is Stipend Income Taxable?

Taxation of Stipend Income has been controversial. Under the Income Tax Act, there is no mention of a ‘stipend.’ The Income Tax Act only states that the ‘salary’ received by an employee is taxed in the hands of the employee. Section 17(1) of the Income Tax Act states that wages, gratuity, pension, commission, fees, or profits in lieu of salary, advance salary, and payment for leaves standing to the credit of the employee are all included under the definition of salary. Further, it is apparent that an employer-employee relationship exists when a salary is paid. The only thing that the Income Tax Act prescribes is that under section 10(16), the scholarship given to meet the cost of education is exempt from income tax.

What is stipend income?

The question that arises is, should we consider a Stipend as a ‘salary’ or ‘scholarship’?

For this, a review of the terms under which such a Stipend is paid must be done. When a it is paid in furtherance of a person’s education, the test is whether it qualifies as a Scholarship. The person may use this money fully or may save it, but as long as it is paid solely for the person’s education and is in the nature of a scholarship, it will be exempt. But it has no relation with articles pursuing CA, who may earn a Stipend, or a professor may receive a payment for doing research work. The purpose of payment is of importance and not the value or the way in which it is spent. Research fellowships and grants received from universities may be exempt when their nature is to support further education.

Stipend as Scholarship

Scholarship is granted to meet the cost of education. A stipend will be considered as a scholarship if its purpose is to give the means of supporting education. Examples of scholarships are research fellowships and awards for academic achievement. It will be exempt from tax. Even if the grant or scholarship amount remains unutilized, the full amount will be exempt from tax. Scholarships are exempt from tax under section 10(16) of the IT Act.

Stipend as Salary Income

When a stipend is paid as remuneration for services provided while gaining experience, it is considered a salary. The purpose of a payment is not to meet education expenses but to compensate for the duties performed. The payment here is similar to a full-time employee, although it is generally lower when compared to salary.

The stipend is taxable under which head of income?

When treated as a Salary

1. A stipend will be taxed under the head ‘Income from Salary’ if the employer deducts TDS and issues Form 16.
2. Where a stipend is taxable, you can save tax by claiming deductions under Chapter VI-A.
3. Any expenditure incurred cannot be claimed as a deduction.

When treated as a Scholarship

1. It is exempt from Income Tax.
2. It is not mandatory to file an ITR where the gross taxable income is lower than the exemption limit. However, you can voluntarily file the ITR on the e-filing portal and show it under the head ‘Exempt Income’.

Doctors receiving Stipends at hospitals.

Generally, doctors earn a payment when they pursue a higher degree at a hospital. The work of a doctor is similar to a full-time employee. The doctor gains experience from such work and performs duties like regular doctors. In such cases, the Stipend should be taxed.

MBA graduates or engineering graduates receiving stipends while pursuing internships at a company

A stipend letter may contain a break of pay as a salary letter does. It may be similar to an employment letter offered to permanent employees. But, if such payment is given to you to gain experience and perform services similar to an employee, then such pay income will be taxable.

TDS on Stipend

Generally, companies do not deduct TSD¹ on stipends, but some companies deduct tax on Stipend, but it is still taxable in your hands based on the nature of the terms or such payment.

Stipend taxed under which head

If your employer deducts tax and issues you a Form 16, then it will be taxable under the head Salaries. Otherwise, it will usually taxed under the head ‘Income from Other Sources’.

No expenses are allowed to be deducted from the Stipend

If you’re earning a taxable payment, then no deduction is allowed for any expenses incurred by you to earn the Stipend. You can save taxes under section 80 deductions.

Should you file an Income Tax Return?

You should file an IT Return if your total income exceeds the minimum income exemption.

Conclusion

In summation, it can be said that if you receive a stipend, you will have to be aware of whether you will have to pay income tax. The taxability of income earned as a stipend depends upon the nature of the payment made.

FAQs

1. https://en.wikipedia.org/wiki/Technical_Support_Division