Taxation of Stipend Income has been a matter of much debate. In the Income Tax Act from a purely factual standpoint there is no mention of ‘stipend’.
‘Salary’ received by an ‘employee’ is taxable in the hands of the employee. Under Section 17(1) – Wages, pension, gratuity, fees or commission or profits in lieu of salary, advance salary, payment for leaves standing to the credit of the employee – have all been included under the definition of salary. It is evident when a salary is paid – an employer-employee relationship exists.
The Income Tax Act has further laid down that ‘scholarship granted to meet the cost of education’ is exempt from Income Tax under the section 10(16).
Now the question arises should we consider Stipend as ‘Salary’ or as ‘Scholarship’.
For this we must review the terms under which such Stipend is paid– when Stipend is paid to further a person’s education, we need to test whether it qualifies as a Scholarship. The person may exhaust this money fully or may end up saving some of it – as long as this has been paid purely in pursuit of a person’s education and is in the nature of a scholarship it shall be exempt. This will have no relation to the position of the person. Usually, Articles pursuing CA may earn Stipend, or a professor may receive stipend for carrying on research work. The purpose of such payment is of importance here – and not the value or the way this has been spent. Research fellowships, grants received from universities may all be exempt when their nature is to support further education.
When Doctors receive Stipend at hospitals – Usually doctors earn stipend as they pursue a higher degree at a hospital. Such work by the doctor is similar in nature to that of a full time employee. The doctor is gaining experience from such work and performing duties like regular doctors – in such cases your Stipend may be taxed.
MBA graduates or engineering graduates receive stipend by pursuing internship at a company – Some companies may even offer accommodation. The Stipend letter may or may not include a break up like a salary letter does. This may or may not be similar to the employment letter offered to a full time employee. However, if this payment is made for you to gather an experience and perform services similar to an employee, such Stipend income shall be taxable.
TDS on Stipend – Some companies may not deduct tax on Stipend; it may still be taxable in your hands, depending upon the nature of the terms or such payment.
Taxed under which head – If your payer has already deducted tax and issued you a form 16 this shall be taxed under the head Salaries otherwise this is usually taxed under the head Income from Other Sources.
No Expenses are allowed to be deducted from Stipend – Do note that if you are earning a Stipend which is taxable, no deduction is allowed for any expenses that you have incurred to earn the stipend. You can save tax in the form of Section 80 Deductions.
Should you file an Income Tax Return – If your total income from all sources is more than the minimum income which is exempt (Rs 2,50,000 for FY 2014-15 and Rs 2,00,000 for FY 2013-14).