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My child just won a scholarship - will I have to pay taxes on it?

A scholarship is aimed at providing help to students who deserve to study further but can’t afford it under their normal circumstances or due to family issues. The payment of this money usually comes in the form of grants by the government or non-government organisations.

  As per the provisions of section 10(16) of the Income Tax Act of 1961, 'Scholarship granted to meet the cost of education' is income which is exempted from taxation.

  Since the Income Tax Act doesn’t specify any maximum limit for scholarships to be tax exempted, the full amount can be considered as exempted.  It can thus be assumed that scholarships aren’t taxable in India but an important distinction can be made in the form of stipend versus scholarship. Stipend income could be taxable since it is payment in place of some work performed or services provided.

  For this, we must review the conditions under which such stipend is paid. If the stipend is paid to facilitate a person’s education, the tax treatment will depend on whether it is classified as a scholarship or a stipend or any other form of remuneration.

The person receiving this money is not gauged on where he spends it – on his education or spending otherwise – as long as it has been paid to them purely for the pursuit of their education. This sum, known as scholarship, shall be exempted from income tax.

The position of an awardee doesn’t have an impact, in such cases.

  However, it is to be remembered that stipends are taxable. Even though the Income Tax Act is silent on the treatment of stipends received by students, it says that any form of income received in lieu of providing work/services is taxable. Hence, if a student receives any form of a stipend for which they are providing additional services to someone, it will be taxable in the hands of the person receiving it as compared to scholarship money which will be fully tax-exempt.

As a result, it can be concluded that scholarship money received in the pursuit of education is not taxable, but the scholarship received as income for providing professional services will come under the tax bracket. The minor must file their returns in this case since the income they receive will be income from salary rather than an income on investments etc. which can technically be clubbed with their parent’s income.

 

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