A scholarship is generally 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 organizations.
Scholarships are usually granted to meet the cost of current education, but are sometimes provided as an incentive for achievement in education, sports and co-curricular activities. Some scholarships are awarded for outstanding performance, such as topping a school/college or achieving the highest marks in a particular subject. Scholarships are sometimes used for purposes other than education or the scholarship awarded is used after a certain interval.
In simple words, 'scholarship' means a grant that has been received on the basis of academic or other achievement to support the education of a student. Thus, there is a need to ascertain whether the amount received as scholarship is taxable under the provisions of the Income Tax Act. It is pertinent that any scholarship given to a student to meet the cost of education is exempt under section 10(16) of the Income Tax Act, 1961.
The words 'stipend' and 'scholarship' have not been defined in the Act. According to Webster's dictionary the term 'stipend' means a fixed salary or compensation for services, whether paid daily, monthly or annually. Nowhere in the Income Tax Act there is a mention of 'stipend', it says that 'scholarship given to meet the cost of education' is exempt from tax under section 10(16).'Stipend' and 'scholarship' have two different meanings and cannot be used as synonyms. A stipend is a compensation paid for a service rendered for the benefit of another, whereas a scholarship is paid for the maintenance of a scholar or student. However, in various judicial decisions it has been held that stipend paid to meet the cost of education during the course of an academic course is subject to section 10(16) and is exempt from tax. Therefore, for the purpose of section 10(16), if a stipend is given to meet the cost of education, it comes within the meaning of scholarship. Therefore, it is not the nomenclature but the purpose which is decisive for determining the exemption under section 10(16). It is a judicial view that the stipends given to apprentices, especially student trainees, are effectively to meet the cost of their education such as cost of books, coaching fee, examination fee etc. and hence Section 10(16) are not different from the scholarships.
Clause 16 to section 10 of the Act in simply worded provision provides for an exemption to the scholarship income. It simply states “scholarships granted to meet the cost of education” is not to be included in the total income of the person. Thus, the essential ingredients to claim exemption u/s 10(16) are-
(i) grant or receipt of a scholarship
(ii) and such scholarship is granted or received to meet the cost of education
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.
However, if a person 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. Therefore the tax treatment of Stipend depends on the purpose of such stipend.
As a result, it can be concluded that stipend money received in the pursuit of education is not taxable, but the stipend received as income for providing professional services will come under the purview of Income Tax Act, 1961.