Taxation of stipend income has been a matter of much debate. The Income Tax Act doesn't even mention 'stipend' anywhere. How should stipend income be taxed then?
Under Section 17(1) of the Income Tax Act — wages, pension, gratuity, fees or commission or profits in lieu of salary, advance salary, payment for leaves standing to the credit of the employee — have all been included under the definition of salary. This is taxable in the hands of the employee.
The Income Tax Act has laid down that 'scholarship granted to meet the cost of education' is exempt from income tax under Section 10(16).
The stipend is paid for someone to support their education. Research fellowships, grants received from universities are all exempt. Note that it doesn't matter if the person exhausted the money fully or saved amount of it, as long as it has been paid for someone's pursuit of education.
MBA graduates or engineering graduates receive stipend during an internship at a company
The stipend letter may or may not include a break up like a salary letter does. This may or may not be similar to the employment letter offered to a full time employee. However, if this payment is made for you to gather an experience and perform services similar to an employee, such stipend income shall be taxable.
Doctors receive stipend at hospitals
Stipend income shall be taxable as doctors on a traineeship perform duties similar to other full-time doctors and the work experience from the traineeship can further their career.
Some companies may not deduct tax on stipend; it may still be taxable in your hands, depending upon the nature of the terms or such payment.
If your payer has already deducted tax and issued you a Form 16 this shall be taxed under the head Salaries otherwise this is usually taxed under the head income from Other Sources.
Do note that if you are earning a stipend which is taxable, no deduction is allowed for any expenses that you have incurred to earn the stipend. You can save tax in the form of Section 80 Deductions.
If your total income from all sources in the financial year exceeds Rs. 2,50,000, you must file income tax return.