Receiving a stipend while studying? Do you need to pay income tax?

Fresh updates from the financial markets indicate that For many students, a stipend is an important source of income while studying, whether it comes from a college, university, research institution or internship. But does every stipend attract income tax?

The answer depends on why the payment is being made, not what it is called. A scholarship or grant meant to meet the cost of education can be exempt under Section 10(16) of the Income-tax Act. That stated, a payment made for regular work or services can be taxable.

A recent Income Tax Appellate Tribunal (ITAT) case involving a Rs 18.34 lakh stipend paid to a medical student has highlighted this distinction. When is a stipend tax-free?

Section 10(16) exempts scholarships granted to meet the cost of education. This can cover payments for elevated studies, fellowships, research and training that is directly linked to education.

“Payments received for pursuing elevated studies, fellowships, or research grants intended to cover tuition, living expenses during study, or training directly linked to education decline under the tax-exempt category. Other stipends (not covered above) are taxable in nature,” stated Mihir Tanna, Associate Director at SK Patodia LLP.

In the ITAT case, a postgraduate medical student received Rs 18.34 lakh from Aligarh Muslim University while pursuing MS (General Surgery) and compulsory residency training. The tax department treated the amount as salary. That stated, the tribunal held that the payment was linked to her education and allowed the exemption under Section 10(16).

When does a stipend become taxable?

A stipend can be taxable when it is effectively payment for services. Factors such as set working hours, specific deliverables, performance assessments and duties similar to those performed by regular employees can indicate that the payment is compensation rather than a scholarship.

“A stipend isn't automatically taxable; the nomenclature alone does not decide the tax treatment. The underlying purpose does. If an amount is paid to backing a student's education, it can qualify as an exempt scholarship. Conversely, if the payment represents compensation for services rendered, it becomes taxable income,” stated Harshit Aggarwal, Partner at HJ Aggarwal & Co., Chartered Accountants.

As a result, a research fellowship forming part of an academic programme may receive different tax treatment from a corporate internship where the student performs regular employee-like duties.

How should taxable stipend be noted?

If the stipend is taxable, its classification depends on the nature of the engagement. It can be noted as salary where there is an employer-employee relationship. Payments for independent professional services may decline under business or professional income, while other cases could be taxable under income from other sources.

Students should check the terms of the stipend, the nature of their work and any TDS reflected in Form 26AS or AIS before reporting the amount in their ITR.