If you generally receive a stipend, you should be aware whether you will have to pay tax for the income before you file for your tax returns. The taxability of the income earned as stipend depends on the nature of the payment made.
So far as the Income Tax Act, 1961, is concerned, there is nothing mentioned about ‘stipend’. When an employee receives a salary from an employer, he/she has to pay tax on the same. Salary is defined as wages, gratuity, advance salary, money received through the encashment of leaves, pension, or profits/commission/fees received in place of salary.
The Income Tax Act, 1961, under Section 10(16) also states that ‘scholarship granted to meet the cost of education’ does not attract any tax, which makes people wonder whether stipend is regarded as a scholarship or salary.
To determine whether or not an income is considered as a stipend, it is important to assess the terms related to the payment of said stipend. When an individual earns a stipend to further his/her education, there are certain conditions that determine whether or not it is considered a scholarship. The income earned may be fully exhausted by the individual, or he/she might even save a portion of it. Regardless, if the stipend is paid so that the individual can pursue his/her education, it will be exempt from tax.
Stipends are usually earned by interns or Articles who pursue a career in chartered accountancy. Even professors could earn stipends to conduct research, which makes the purpose of the stipend crucial to determining whether it is salary or a scholarship. The manner in which the stipend is spent by the individual who earns it or the value of the stipend do not play a part in determining whether it is salary or a scholarship. Grants from universities and research fellowships qualify as scholarships as they aid in further education, and are thus exempt from tax.
Stipends Received By Doctors At Hospitals
When doctors pursue their further education at hospitals, they generally earn stipends. The work performed by these doctors, however, is somewhat similar to the kind of work done by full-time employees. Since the doctor gains experience through this work whilst performing the same duties as regular doctors, the stipend they earn will be subject to tax.
Stipends Earned By Engineering Graduates Or MBA Graduates While Interning At Companies
Companies usually pay stipends to interns. Since the interns are performing similar duties as regular employees of the company and also gaining valuable work experience at the same time, their income (stipend) will be subject to tax.
Stipends and Tax Deducted At Source
A number of companies do not deduct TDS on stipends paid to their interns, but it does not mean that the income is tax-free. It could still be taxable in the individual’s hands based on the nature of the payment. In case the company has already subtracted tax and the individual has received a Form 16 from the payer, the tax will fall under ‘Salaries’. If not, it will be taxed under ‘Income From Other Sources’.
When it comes to saving tax on stipends, the only deductions that can be claimed are those that fall under Section 80D of the Income Tax Act. Individuals who earn stipends can file their income tax returns only if their overall earnings for the financial year exceed the minimum taxable limit.