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On the day placement presentations began on campus, Ashish Sinha (name changed on request) wanted to intern with a company that offered a project abroad. The reason was obvious - a better stipend than what a project in India could offer. Sinha is a first-year student at one of India's premier B-schools.
The wait seemed very long; it was only on the last day of the placement season, in November, that he got selected by a European financial services company. But in so many days, he has not been able to decide what to do with the stipend he would earn. He earlier planned to give all the money to his father. Then he thought of keeping it for himself, for his second-year college expenses. As on date, Sinha plans to use the money to part-pay the education loan he's taken for this course.
Only two students have got this offer at Sinha's institute. Typically, less than 10 students (across graduation and post-graduation courses) get to intern abroad. They can earn up to $3,500 a month or Rs 2.17 lakh ($1 = Rs 61.98).
Sinha might have to go to Europe for two months in the summer of 2014. As stipend, he would earn Rs 2.1 lakh for the two months. He would be paid Rs 75,000 in India and another euro 1,600 (Rs 1.35 lakh; euro 1 = Rs 84.75) as stipend in Europe, apart from the stay and food allowance for two weeks of stay.
Unfortunately, there could be a tax angle to this happy story. Tell Sinha he might have to file a tax return for financial year 2014-15 and his jaws drop. Since a stipend is considered an income by the income tax (I-T) authorities, it is taxable according to the applicable slab.
Explains Parizad Sirwalla, a chartered accountant, "Section 10(16) of the I-T Act says any scholarship received to meet the cost of education is exempt from tax. A stipend received to meet the cost of education may also be treated as scholarship and exempt under the section."
However, this might not hold true in Sinha's case. "There have been judicial precedents which have interpreted scholarships to include stipends, fellowships, grants for travel, etc. To claim the tax exemption, the payment has to necessarily mean some payment to meet the cost of education to the person pursuing the education and incurring costs for it. Any payment which constitutes remuneration for services rendered arising out of an employer-employee relationship and not for cost of education would be subject to taxes as salary income," explains Sirwalla. In cases where income is exempt from tax there, the view is that there was no employer-employee relationship between company and individual, as there was no provident fund being paid to the individual.
Taxation for resident students
Given that Sinha will earn Rs 75,000 in India, this income will be taxable in India on the slab applicable. On earning of euro 1,600 in Europe, he will be taxed as applicable there.
The income will be taxed in India only if Sinha will be categorised as an Indian resident. All incomes earned in a foreign country are taxed in India even for students, except minors. Reason: The I-T Act says an individual deputed in a foreign country on work for less than 180 days in a year is considered an Indian resident. Sinha's internship is for two months.
"Say the euro stipend is taxable in Europe; then the organisation will withold tax at source and then pay the candidate. Accordingly, the candidate may or may not have to file returns in Europe. In some foreign countries, non-residents may not need to file returns if appropriate tax has been witheld at source. But a few countries may want returns to be filed," says Vaibhav Sankla, director at tax consultancy firm H&R Block.
By the present tax slabs, Sinha will not need to pay any tax on the rupee stipend of Rs 75,000, as the income is below the basic exemption. However, even after the euro stipend is taxed in Europe, Sinha will have to pay taxes in India. In India, Sinha will fall in the 10 per cent tax bracket, as his euro and rupee stipend together falls in the Rs 2-5 lakh income bracket (which also permits a rebate of Rs 2,000, assuming Sinha has no other income). That is, the tax amount would be Rs 21,060. The basic exemption limit presently stands at Rs 2 lakh for both males and females below the age of 60.
However, the tax outgo can be reduced by showing investments in tax-saving instruments. If, for instance, Sinha uses the stipend to part-pay his education loan, he will get tax benefits under Section 80E of the I-T Act.
Can take tax credit
He will get respite from double taxation in the form of foreign tax credit and tax treaty benefits from the Double Tax Avoidance Agreement (DTAA) applicable. It is a bilateral economic agreement that aims to avoid or eliminate double taxation of the same income in two countries. If one pays tax in both India and Europe, there is a provision whereby an individual can get foreign tax credit in the home country. Suppose you are taxed Rs 50,000 in the foreign country and your total tax liability in India is Rs 1 lakh. You will have to pay only the remaining Rs 50,000 in India after claiming the foreign tax credit, provided one has a foreign tax certificate. But, if the tax in the home country is less than what was paid in the foreign country, the differential is not refunded.
If your country of residence and the foreign country have a DTAA between them, the student or any individual will be exempted from paying tax there. For example, students who earn from internship in the US will be exempted from paying tax, as part of the India-US tax treaty.
Tax on allowance
As for the allowance that Sinha would get, he will have to show he used it for stay and food in Europe. That should not be a problem, as showing the offer letter for internship should suffice. Otherwise, it will be taxed at the applicable slab.
That's why many show their stipends also as an allowance, to escape the tax net.
Taxation for non-resident students
A non-resident Indian (NRI), studying in India for a fixed period, will not attract tax on his/her stipend earned abroad. That is because an NRI's income earned in a foreign country is considered global income and is not under the Indian tax law. According to the I-T Act, any individual who has stayed outside India for more than 180 days is an NRI. Such individuals will be taxed only in the host country.
However, NRI students interning with an Indian company and earning will be taxed on the applicable slab under the I-T Act.
