How Do Start-Ups Handle Tax Deductions on Intern Stipends? Seeking Guidance!

I am the HR in a start-up company. We hire paid interns on a short-term and long-term basis. However, I am unclear on how a company accounts for the stipend paid to the interns and whether we are supposed to deduct taxes on the stipend payments. If someone could guide me on this, it would be really helpful.

Internship as Part of College Curriculum

Internship is a part of the college curriculum wherein students are expected to undergo professional, practical work experience. Normally, the internship period will be in the range of 3-6 months.

Long-term Internships and Employment

If you are hiring interns on a long-term basis, then it is not an internship but should be considered as employment. The amount should be treated as a salary and not as a stipend. Salaries are always subject to TDS if they exceed the limits stipulated by the Income Tax Department.

Thank you, Lakshmi, for your response. I would like to have a deeper understanding of the front for a 3-6 months internship. How do we account for that stipend? Are there any thresholds for tax deductions?

Hi, it depends on the employer. Many employers allow interns without a stipend, whereas some employers pay a meager amount.

Tax Exemption for Short-term Internships

Mostly, short-term internships with stipends are exempted from tax. Please refer to the following for more clarity: https://cleartax.in/s/are-stipends-taxable

What is the amount of stipend?

From an accounting point of view, stipends are similar to salaries and need to be accounted for in the same way. For TDS, I suggest you talk to your CA or auditor who will help you decide on it.

Other statutory dues such as PF and ESIC are applicable if the internship is not under the Apprentice Act.

The importance of using 'stipend' instead of 'remuneration'

The purpose of referring to 'remuneration' as 'stipend' when employing individuals is crucial, especially in the context of apprenticeship trainees. It is important to note that the term 'stipend' is specifically relevant to this group. Categorizing them as 'interns', a designation typically reserved for students as part of their educational curriculum, may lead to confusion.

These individuals are engaged for short-term (ST) and long-term (LT) roles and should be recognized as employees. In Indian practices, they are more accurately described as 'contract employees' rather than 'interns'. This distinction becomes clearer when engaging them through a 'licensed contractor' under the CLR Act. Conversely, if you are directly providing their 'salary/wages', it establishes an 'employer-employee' relationship.

The current approach you are employing might be perceived as 'misleading' with questionable intentions, and it may not be considered appropriate.