When Smt Lata from Rewari, Haryana, got a Rs 18.34 lakh stipend from the Aligarh Muslim University for her PG Medical education and the compulsory residency training, she took advantage of the Section 10(16) tax exemption and paid no taxes.
For those unaware, Section 10(16) states that if a student is awarded a scholarship or stipend to cover their educational expenses, it’s tax-free. In this case, Smt Lata is a full-time student pursuing Post Graduate degree course in General Surgery.
However, the Income Tax Assessing Officer from ITO, Sonipat, disagreed with Smt Lata and treated her educational stipend as taxable salary instead of an exempt scholarship under Section 10(16), making her responsible for paying taxes on it. The Commissioner of Appeals (CIT A) also agreed with the AO and upheld the addition of the stipend to her income. Unhappy with the decision, Lata appealed to the Income Tax Appellate Tribunal (ITAT) Delhi.
Chartered Accountant Anirudh Bharadwaj represented her before ITAT Delhi. Judicial Member Satbeer Singh Godara of ITAT Delhi heard her case and passed the judgement on July 30, 2026. She won the case and so doesn’t have to pay income tax on the Rs 18.34 lakh stipend she received from the Aligarh Muslim University.
Scholarship is tax free?
Chartered Accountant Suresh Surana said to ET Wealth Online that a scholarship is not taxable merely because it is received as a stipend, fellowship or research grant. The tax treatment depends on the true nature and purpose of the payment.
Section 10(16) of the Income Tax Act, 1961 gives total Income Tax exemption to any scholarship which is given to a student to meet his/her cost of education. This means that scholarships, fellowships or research grants may qualify for Income Tax exemption if they are primarily intended to support the student’s education, academic training or research. But this also means that if the said scholarships, fellowships or research grants is given as remuneration for services rendered then it is taxable. In Smt Lata’s case, the main dispute was this only; the Income Tax Department wanted to treat this stripend as remuneration instead of scholarship claimed by her.
On the other hand, where a stipend or research payment is effectively made in consideration for employment, professional work or services performed, it would generally be taxable even if described as a scholarship or fellowship. Thus, the decisive test is the substance of the arrangement and the purpose for which the amount is paid, rather than the nomenclature used.
This principle was applied in the case of Hiteshi Aggarwal v. PCIT, where stipend received during a postgraduate medical course was accepted as exempt under section 10(16). The Delhi ITAT followed the same reasoning in Smt Lata’s case since her stipend was received while pursuing MS (General Surgery) and was connected with her postgraduate education and compulsory residency training.
Why did she win the case in ITAT Delhi?
Surana says that the ITAT Delhi accepted Smt Lata’s contention. In doing so, ITAT Delhi relied upon the earlier decision of the Chandigarh Bench in Hiteshi Aggarwal v. PCIT, where stipend received by a doctor during a postgraduate medical course had been held to be exempt under section 10(16).
In that decision, ITAT Chandigarh had examined the educational nature of the payment and held that a stipend received during postgraduate medical studies, where it is connected with the course of education, cannot merely be equated with salary.
Applying the same reasoning to Smt Lata’s case, the Delhi ITAT noted that there was no dispute regarding her status as a postgraduate medical student or the fact that the stipend had been received while pursuing the MS (General Surgery) course and completing the compulsory residency attached to it. ITAT Delhi accordingly treated the payment as being connected with the pursuit of education rather than as remuneration arising from an ordinary employer-employee relationship. It therefore directed deletion of the addition of Rs 18,34,578.
This is why Surana says that stripend’s purpose also needs to be looked i.e. if it is made to a student to support his/her education (like in Smt Lata’s case) or it is a remuneration.
Surana says that if a stripend is given to a student for education purposes and it also includes compulsory practical or residency requirements, then also the stripend may qualify as a scholarship under section 10(16) of Income Tax Act, 1061.
This means that the fact that student performs practical or clinical duties as part of the course does not, by itself, convert the educational stipend into salary.
Accordingly, Smt Lata won because the stipend was found to be intrinsically connected with her postgraduate medical education and compulsory residency training. Following the established ITAT Chandigarh precedent on similar facts, the Delhi ITAT held that the amount was eligible for exemption under section 10(16) and allowed the appeal.
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