She received Rs 18.34 lakh as a medical student stipend and paid no tax, but Income Tax Department treated it as salary and sent notice; why ITAT Delhi ruled it was tax-free
Is the stipend you receive as part of your scholarships taxable? A postgraduate medical student received a stipend of Rs 18.34 lakh from Aligarh Muslim University during her PG Medical course and compulsory residency training. She treated the amount as exempt from income tax under Section 10(16) and did not pay tax on the stipend.The Income Tax Assessing Officer from ITO, Sonipat, however, took a different view. The officer treated the stipend as taxable salary rather than as an exempt scholarship under Section 10(16), thereby adding the amount to her taxable income. The Commissioner of Appeals (CIT A) upheld the AO’s decision.The taxpayer then challenged the order before the Income Tax Appellate Tribunal (ITAT) Delhi. Judicial Member Satbeer Singh Godara heard the matter and delivered the judgment on July 30, 2026.The ITAT Delhi ruled in her favour, allowing the Rs 18.34 lakh stipend to remain exempt from income tax.
What the case is about
Section 10(16) provides an income tax exemption for scholarships granted to students to meet the cost of their education. In this case, the taxpayer was a full-time student pursuing a Post Graduate degree in General Surgery.The fact that an educational payment is called a stipend, fellowship or research grant does not by itself determine whether it is taxable. What matters is the actual nature of the payment and the reason for which it is being provided.Section 10(16) of the Income Tax Act, 1961 provides a complete income tax exemption for a scholarship granted to a student to meet the cost of education. Therefore, scholarships, fellowships and research grants can qualify for the exemption when their primary purpose is to support education, academic training or research.The position is different when the payment is actually compensation for services. If an amount described as a scholarship, fellowship or research grant is paid in return for services rendered, it can be treated as taxable income.This distinction was at the heart of the dispute in the taxpayer’s case. The Income Tax Department sought to treat the stipend as remuneration, whereas the taxpayer maintained that it was an educational scholarship covered by Section 10(16).
How the student won the case
Chartered Accountant Suresh Surana told ET that the same principle applies where a stipend or research-related payment is effectively linked to employment, professional work or services performed. In such circumstances, the amount would generally be taxable regardless of whether it has been labelled a scholarship or fellowship.Thus, the description attached to a payment is not decisive. The substance of the arrangement and the purpose for which the money is paid are what determine its tax treatment.The same approach was followed in Hiteshi Aggarwal v. PCIT, where a stipend received during a postgraduate medical course was accepted as exempt under Section 10(16).ITAT Delhi applied this reasoning in the present case as well. The stipend was received while the taxpayer was pursuing MS (General Surgery) and was connected with her postgraduate education and compulsory residency training. On that basis, the tribunal allowed the Section 10(16) exemption on the Rs 18.34 lakh stipend.According to Surana, ITAT Delhi accepted the taxpayer’s argument and relied on an earlier ruling of the Chandigarh Bench in Hiteshi Aggarwal v. PCIT. In that case, the tribunal had held that a stipend received by a doctor while pursuing a postgraduate medical course was exempt under Section 10(16).The Chandigarh Bench had looked at the nature and purpose of the payment and concluded that a stipend received during postgraduate medical education, when it is linked to the course being pursued, cannot simply be treated as salary.ITAT Delhi applied the same reasoning in the present case. It was undisputed that the taxpayer was a postgraduate medical student and that she received the stipend while pursuing MS (General Surgery) and completing the compulsory residency that formed part of the course.The Delhi tribunal therefore found that the payment was connected to her education rather than being remuneration arising from a conventional employer-employee relationship. It consequently directed that the addition of Rs 18,34,578 be deleted.Surana said the purpose behind a stipend is therefore important when deciding its tax treatment. The key question is whether the payment is intended to support a student’s education, as in this case, or whether it is actually compensation for services.A stipend paid to a student for educational purposes can also qualify for exemption under Section 10(16) when the course involves compulsory practical or residency training, Surana said.Simply performing practical or clinical duties as part of the academic programme does not, by itself, change the character of an educational stipend into salary.In this case, the stipend was found to have a direct connection with the taxpayer’s postgraduate medical education and mandatory residency training. Since the facts were consistent with the earlier ITAT Chandigarh ruling, ITAT Delhi held that the Rs 18,34,578 payment qualified for exemption under Section 10(16) and allowed the appeal.
