Income Tax on Stipend Income

A large number of companies and NGOs engage trainees in their organizations to whom they pay a fixed amount in the form of ‘Stipend’. In certain professions like Chartered Accountancy, medicine, law, etc., it is mandatory for the employer to pay ‘stipend’ to their intern or article at the prescribed rates. Further, the Government awards ‘Stipend’ to students pursuing PhD. or JRF/SRF (Junior or senior research fellowship). A question arises “Whether Stipend Income is taxable or not under the Income Tax Act?”. The question becomes even more important when TDS is deducted by the employer of the trainee and is reflected in Form No. 26AS of the trainee.

The answer to this question is quite debatable as there is no specific provision under the Income Tax Act for the taxability of stipend. Even, the term ‘Stipend’ is not defined anywhere under the Act. In this article, we will try to answer this question in the light of section 10(16) of the Income Tax Act which talks about the taxability of scholarship.

A perusal of the above provision makes it clear that any scholarship income received to meet the cost of education shall be exempt from Income Tax. Therefore, we can make a strict legal interpretation that the exemption from a scholarship is meant only if any such amount is given to be used to meet the education expenses. So, we have to see whether ‘Stipend’ falls within the ambit of the term ‘Scholarship’. For this purpose, we shall first understand the meaning of ‘Scholarship’.

What is a Scholarship?

The term ‘Scholarship’ is not defined in the Income Tax Act. Therefore, we will refer to the dictionary meaning of the same. According to Cambridge Dictionary, ‘Scholarship’ means an amount of money given by a school, college, university, or other organization to pay for the studies of a person with great ability but little money. Refer: https://dictionary.cambridge.org/dictionary/english/scholarship

In our opinion, the term ‘Scholarship’ shall include the amount of fellowship, stipends, grants for education or travel, etc. so far as these are awarded for education purposes. Hence, if a stipend is granted to the student for the purpose of meeting his education expenses, it will be treated as ‘scholarship’ and therefore exempt in accordance with the provisions of section 10(16) of the Act.

Thus, the purpose for which a stipend is given is important to decide the taxability of the stipend. If the purpose of granting a stipend is to help the trainee to meet his living cost, it will not fall within the ambit of section 10(16) and will therefore be taxable under Income Tax Act.

Is Stipend to doctors pursuing PG taxable?

When doctors pursue PG courses, they are required to work in a hospital as interns. During their internship, they perform work similar to a full-time doctor and earn stipends. The stipend payment is made to doctors to gain experience and perform services similar to a full-time doctor employed in the hospital. Therefore, stipend to doctors pursuing PG courses cannot be considered as ‘scholarship’ within the ambit of section 10(16) of the Income Tax Act. Hence, the stipend received by the doctors is taxable under Income Tax.

Is Stipend earned by a CA Student during articles training taxable?

Under the curriculum of the Chartered Accountancy Course, it is compulsory for a student to undergo practical training from a practicing CA firm for the prescribed period. As per the regulations of ICAI, the students are given stipends at the fixed rates for the training period. Practical training forms an integral part of the Chartered Accountancy Course. A newly passed out student of CA entrance is not supposed to have any knowledge of work and therefore the training is intended to give him practical exposure. Hence, the stipend paid to an article cannot be treated as a reward for his services but is meant for meeting his incidental expenses in course of training and thus not taxable.

In the decision of ITAT Jaipur in the case of Sudhir Kumar Sharma vs. ITO (1983 15 Taxman 100 Jaipur Mag): 17 ITJ 226, it was held that stipend received by an articled clerk from a chartered accountant is exempt under section 10(16). According to Tribunal, the stipend is paid to meet the cost of books, coaching fees, examination fees and so on hence stipend is not taxable in the light of section 10(16).

Is stipend received by MBA or engineering graduates taxable?

This question is also similar to that of medical interns. The MBA or engineering graduates working as interns perform work similar to that of a regular employee and are paid a stipend for their work. Therefore, the stipend income derived by them will not be eligible for exemption u/s 10(16) of the Income Tax Act. These individuals will be liable to pay income tax on stipend income.

Is stipend exempt if TDS is not deducted?

The fact that tax has been deducted on the stipend or not is not relevant to decide the taxability of stipend income. We will have to analyze the purpose of the stipend on the basis of principles as discussed above. If it is ascertained that the stipend is taxable, then it should be offered for tax irrespective of whether TDS is deducted or not.

Is ITR required to be filed for stipend income?

If you are earning a stipend in excess of Rs. 2,50,000 (basic exemption limit) or your other incomes together with stipend is more than Rs. 2,50,000, you are mandatorily required to file an income tax return. The income tax return can be filed online through Income Tax Portal. Please use the correct ITR form for filing income tax returns for stipend income.

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Which is the suitable ITR form for stipend income?

The selection of a suitable ITR form depends upon the nature of income earned by a taxpayer. If the taxpayer is not having a business income, he shall use ITR-1 or ITR-2 for filing his income tax return in respect of stipend income.

 Which is the suitable head of income for stipend income in the ITR?

If the employer has deducted tax at source on the stipend income under section 192, the taxpayer should disclose stipend income under the head “Income under the head salary”. Otherwise, stipend income should be disclosed in the income tax return under “Income from other sources”.

Is deduction for expenses allowed against the stipend income in ITR?

No deduction for any expenses is allowed from the stipend income whether it is disclosed under the head “Income from Salary” or under “Income from other sources”.

Other instances of exemption of scholarship/ stipend under section 10(16)

Is the stipend under JRF/SRF taxable?

Stipend earned by the students from universities for carrying out research under JRF/SRF program shall be exempt from income tax.

Disclaimer: The above article is based upon the opinion of the author and is meant for informative purposes only. There may prevail different opinion also. Therefore, the readers are requested to act diligently before applying the information contained in this article.