Tax on scholarship Stipends to students
For this, we must review the terms under which such a Stipend is paid. When a Stipend is paid to further a person’s education, we need to test whether it qualifies as a Scholarship. From a purely factual standpoint, the Income Tax Act does not mention ‘stipend’.
For W-2 employees, stipends cannot replace salaries, they can only be an added benefit to an employee’s salary. But if a stipend is treated as a Scholarship then TDS will not be applicable. The hospital /management will be liable to deduct TDS on such stipend paid, in case where it could come under the head ‘Salaries’ or ‘Professional Income’. Also, from a practical perspective, we have noticed that most hospitals deduct TDS on stipend paid to PG Doctors on a conservative basis to avoid disallowance of the said expenditure. It is to be highlighted that there is no relevance on how the amount was spent or if he has only spent a portion of it, saving the rest. The taxability of stipend is dependant solely on the purpose with which it was paid by the hospital.
Stipend paid to MBA Interns
Further, the Act defines the term ‘Salary’, which covers Wages, Pension, Gratuity, Fees or Commission or Profits in lieu of salary, Advance salary & Payment of leaves standing to the credit of the employee. Salary also demands the existence of an employer-employee relationship. This was what sparked all the debates, whether stipend is to be considered as ‘Salary’ or as ‘Scholarship’.
How to calculate taxes on stipends
The taxation of stipend income is a debated topic as it is not mentioned in the Income Tax Act. The Act considers stipend as a salary if it is paid in an employer-employee relationship and exempts it if paid solely for educational purposes. Stipends can also be taxable if they are earned as part of internships or research work.
If the company has already deducted tax and the individual has received a Form 16 from the payer, the tax will fall under income from salary. There are judicial precedents wherein stipends paid to doctors have been held as exempt from tax. Further, various adjudicating authorities have held that the stipend earned by PG students in pursuance of their course is to be considered as scholarship (i.e., exempted from tax). But in those cases, the agreement clearly stated that the amount was paid to further the education and training of the recipient and was not paid as a compensation for his services. 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.
Some companies pay stipends to help cover housing, food, or travel expenses. As mentioned above, stipends are not hourly-based pay and are often used by employers as a lower-cost option to pay interns or to offset the cost individuals bear while executing certain services. For instance, fringe benefits like parking are only taxable after a certain amount. Be sure to consult with a tax consultant if you’re unsure about the tax implications of your stipend. If the company identifies you as an employee, your stipend may be taxed and you won’t receive the full amount.
Contact Forma today for more advice on offering stipends
Stipends are commonly offered to researchers at academic institutions or other related organizations to help them focus on their projects. Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
Ultimately, stipends can be a worthwhile investment for employers looking to attract and retain top talent, boost employee satisfaction, and support a positive company culture. If you’ve decided to offer taxable stipends to your employees, it’s important to administer them correctly to remain compliant with IRS regulations. Any amount received by the employee from the employer to aid his own studies and research is eligible for exemption under section 10(16). Even if the stipend amount is taxable, it is charged either as salary income or income from other sources from which no deduction is allowed for any expenses under the Income Tax Act. The answer to this question is quite debatable as there is no specific provision under the Income Tax Act for the taxability of stipend.
Stipend earned by the students from universities for carrying out research under JRF/SRF program shall be exempt from income tax. 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. Maintain proper documentation of the stipend received and any expenses incurred, as these will be required for accurate reporting and for claiming any deductions. However, scholarship granted to meet the cost of education is exempt from Income Tax under section 10(16). A stipend is a fixed sum of money paid periodically for specific purposes, such as internships, fellowships, or apprenticeships.
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 stipend is taxable or not Accountancy, medicine, law, etc., it is mandatory for the employer to pay ‘stipend’ to their intern or article at the prescribed rates. 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. Usually, doctors earn stipend as they pursue a higher degree at a hospital.
- Stipends cannot be used to hire students to replace existing staff, and the students must be the primary beneficiaries of the employment or training—not the company.
- Salaried employees often receive additional benefits such as health insurance, retirement plans, and paid time off.
- Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
- One needs to analyse if the amount has been paid purely for the purpose of his education.
- While stipends and salaries may seem similar, they have distinct differences in terms of how they’re paid and taxed.
- Schedule a consultation with one of our experts today to discover how we can tailor a stipend solution that meets your specific needs.
If it is ascertained that the stipend is taxable, then it should be offered for tax irrespective of whether TDS is deducted or not. A stipend is usually offered as compensation for training instead of salaries for employment purposes. That being said, it allows people to pursue work that is normally unpaid by helping defray living expenses. A stipend is often offered to individuals as a fixed sum and is commonly paid to the recipient as a lump sum payment. This type of compensation is sometimes called an allowance and is normally provided on a daily, weekly, or monthly basis. The Income Tax Act has further stated that ‘scholarship granted to meet the cost of education is exempt from Income Tax under section 10(16).
If your payer has already deducted tax and issued you a form 16, this shall be taxed under the head Salaries; otherwise, it is usually taxed under the head Income from Other Sources. If your employer doesn’t withhold taxes on your stipend, you’ll need to calculate and pay the taxes yourself. Foundations and comparable entities might also offer stipends on similar terms to support the work of researchers and the projects they are developing.
Their work by the doctor is similar in nature to that of a full-time employee. The doctor is gaining experience from such work and performs duties like regular doctors – in such cases your Stipend may be taxed. This means that if you receive a stipend, you’ll likely need to report it on your tax return and pay taxes on the amount. A salary is compensation for work performed and is a set amount, typically per year.
Since employers don’t have to offer health benefits to interns, some of them may offer their workers extra money by adding it to their paycheck to help them with health insurance costs. Individuals can then use this extra cash to put toward paying for their insurance premiums for coverage that can be purchased either through the healthcare exchange or directly from private insurers. As such, stipends can vary depending on the company or organization that pays them.
When deciding whether to offer stipends, consider your company’s goals, budget, and employee needs. Employee surveys and focus groups can help you identify which stipends would be most valuable to your team. You should also consult with a tax professional or benefits administrator to ensure that your stipend program is compliant and effective. However, it’s important to understand the tax implications of stipends and administer them correctly to avoid penalties. Employers must determine which stipends are taxable, calculate the value of fringe benefits, and withhold taxes appropriately.
