A stipend is paid to interns, generally students, and article associates who study medicine, accountancy, engineering, and so on. The Income Tax Act, 1961, has not clearly defined if a stipend income is taxable. Here, if the stipend income received is taxable depends on the purpose of the internship.
As you might already know, the scholarship grants received by students and scholars are made tax-free in their hands. The question that arises here is if the stipend income received by students can be considered as scholarship, salary, or income from other sources.
The scholarship and research grants are exempt from taxation as they are considered educational aid or support. Students pursuing MBBS and BDS may be required to take up a one-year internship in the final year of their course. The duties performed by these students in their internship would be very similar to that of a qualified full-time practising doctor. Hence, the stipend earned from such an internship can be considered taxable.
Engineering and MBA graduates interning at a firm may receive stipend income. Whether such income is taxable or not depends on the internship agreement. If the intern performs duties similar to a full-time employee and is gathering experience, then the stipend income is taxable.
Now, coming to the stipend income received by articles in their articleship, it is not considered taxable. This is because a newly hired article would not have enough knowledge and expertise to carry out functions like a full-time practising accountant. The main intention of articleship is to let the aspiring CAs get much-needed real-time learning, where they can implement their knowledge and expand the same.
The companies paying stipends may or may not deduct TDS. Even if the TDS is not deducted, the person receiving the stipend may have to pay tax on their stipend income, depending on the nature of the internship agreement.
If the firm has deducted TDS from your stipend payment, then you are supposed to receive Form 16. In this case, the stipend income is treated as income from salary and is taxed accordingly. If not, then the stipend income is treated as an income from ‘other sources’. If your stipend is taxable, then note that there are no deductions or exemptions allowed.
You have to mandatorily file your income tax return if the overall stipend income exceeds Rs 2,50,000. It is advisable to file your ITR even if your stipend income does not exceed this limit. There are various benefits associated with filing ITR despite having an income less than the exempt limit.
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