The tug of war between Doctors and the Income Tax Department has gone on for a very long time regarding the taxability of stipend received by them during their course of training or internship in the hospital as a part of Post Graduate degree programs.

Salary vs Scholarship11

The confusion arises because, in the Income Tax Act, there is no mention of the word ‘Stipend’. The act provides that ‘scholarship granted to meet the cost of education’ is exempt from Income Tax under Section 10(16). 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’.

Students pursuing CA course and PhD students may receive stipends, research fellowships and grants which are clearly intended for supporting the educational journey, which becomes exempt. However, MBA graduates who involve in internships at various companies to gain experience, perform all the services similar to that of an employee. In such cases their stipend may become taxable.

This is where the significance of the literature in the agreement between Doctors and the Institution come into play, as review will be done on the terms and conditions under which the professionals has been admitted. One needs to analyse if the amount has been paid purely for the purpose of his education. If so, the amount falls under ‘scholarship’.

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.

Why the confusion on stipend earned by Doctors?

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.

It was noted that the payment was not paid to serve the interests of the grantor and also that students undergoing PG Course were not allowed to do private practice or part time job during the entire period of study. Thus, the stipend paid in such cases clearly came under the term ‘scholarship’ and was declared eligible for exemption.

However, the Tax Department could take a contrary stand that doctors are qualified professionals owing to their MBBS degree and accordingly stipend paid to doctors could partake the nature of salary or professional fees. It could also be contended that when the doctors are paid stipend by the hospital, although they are working as part of gaining a higher degree, they are also performing all the duties in the profile of a regular, full-time employee. Their hours are more or less same when compared with a permanent employee at the hospital. This makes their stipend liable to taxation, especially when their agreement doesn’t mention anything that points otherwise.

Stipend and TDS

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.

Failure to deduct TDS does not exempt the tax liability in the hands of the payee, accordingly, even if TDS is not deducted by the hospital, the stipend income could be disclosed under the head ‘Income from Other Sources’ while filing the personal tax returns.

However, in a scenario, wherein the stipend income is claimed as exempt, adequate documents would be required to be maintained to substantiate before the Tax Department that the stipend is in the nature of a scholarship provided to meet cost of education.

I just earnt stipend, am I required to file income tax return?

In case of individuals who earn stipend, it is mandatorily required to file their income tax returns only if their overall earnings for the financial year exceed the minimum taxable limit (which currently set at INR 2.5 lakhs).

However, in cases where the hospital / management has withheld taxes, it is recommendable to file tax returns. The students could contact their respective accounts and administrative departments in this respect or under the direction of a CA, file income tax return and claim refund for the same.

Conclusion

It is quite clear from the detailed analysis that taxability of stipend paid depends on the nature of stipend, the purpose for which it was disbursed. It is also important that the terms of agreement state the same, which can then be utilised as a valid proof for negotiating with the management and department.

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1. Case Laws for Reference:

• A.Ratnakar Rao Vs ACIT (1981) 128 ITR 527 (Kar.)
• ITO Vs Dr.G.N. Ramachandran (1982) 1 ITD 902 Bang
  
• Dr. J. C.N Joshipura v. ACIT (1996) 56 ITD 424 (Mum. Trib) had made the observation that the term “cost of education” takes within its ambit not only tuition fee but all other incidental expenses incurred for acquiring education.
  
• Rahul Tugnait (Dr.) vs. ITO (2010) 124 ITD 480 : [2009] 315 ITR 139 (Chd) : ITA No. 197/CHD/2008 - The ITAT, Chandigarh SME Bench, held that the stipend received by a student pursuing his post graduation (‘PG’) at a medical college be termed as scholarship and exemption under section 10(16) of the Act is to be allowed.
  

2. In the case of Junior Doctors Association vs. CIT (W.P. No. 1309/2007), the Madhya Pradesh High Court observed that there is no relationship of employer and employee between the State Government and a student doing PG Course. It also held that a stipend paid to a PG student is to meet the cost of education and thus would be in the nature of a 'scholarship' and thus exclude the amount from the taxable total income under section 10(16) of the Act.