Many a times, we have been asked by our clients, whether income tax is chargeable on stipend income and whether they should file their income tax returns for the stipend they have earned?
Let’s discuss it in details:-
Taxability of stipend is a matter of debate as Income Tax Act doesn’t specifically define its taxability.
For the sake of argument, stipend can be of two types:-
1. In the nature of salary: Salary given by the employer is taxable in the hands of the employee. Salary includes wages, pension, gratuity, fees, commission or profits in lieu of salary and advance salary. An employer-employee relationship exists when the salary is paid.
2. In the nature of Scholarship: Scholarship is exempt u/s 10(16) if it was granted to meet the cost of education.
Under what circumstances, should we consider a stipend as a Salary or a scholarship?
The terms under which the stipend is paid should be reviewed before forming any opinion. If the stipend is in the nature of assisting any person’s education, whether or not he has utilised the full amount exclusively for education, then it should be classified as a scholarship and should be exempt from taxes. The value spent or the way it was spent is not important in this case, the purpose for which it was given is more important. Eg. CA Article assistant stipend, grant received from universities and Research fellowships.
On the other hand, if the stipend was given to you to gather an experience and expected to perform similar services as other employees, then the stipend given in this case will be in the nature of Salary, hence taxable. Eg. Doctors receiving stipend in hospitals to pursue higher degree and work full time with other senior doctors.
Income Tax return must be filed, if your total income exceeds the basic exemption limit for the year. If employer has deducted TDS and issued For 16, then this income should be reported under the Income head “Salaries” else in the income head “ Income from other sources”. No expenses incurred by the person to earn this stipend should be claimed as deduction and taxes to be paid on full received amount of stipend.
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