NATS Stipend Taxability 2026: Taxable or Scholarship?

Statutory Genesis & Current Legal Posture

The National Apprenticeship Training Scheme operates under the Apprentices Act, 1961, read with the Apprenticeship Rules, 1992. Section 18 of the Apprentices Act provides that every apprentice undergoing apprenticeship training in a designated trade in an establishment shall be a trainee and not a worker. The provision further states that the provisions of any law with respect to labour shall not apply to or in relation to such apprentice .

The stipend structure under NATS has been revised effective April 1, 2026, through a circular issued by the Board of Apprenticeship Training (Western Region), Mumbai (No. BOAT WR/2026/529 dated May 13, 2026). The revised minimum stipend rates are:

• Technician (Vocational) Apprentice: ₹9,600 per month
• Technician Apprentice (Diploma Holder): ₹10,900 per month
• Graduate Apprentice (Degree Holder): ₹12,300 per month

Under the existing NATS guidelines, the total minimum stipend is shared equally between the Government of India (50% disbursed through Direct Benefit Transfer to the apprentice) and the establishment (50% paid directly by the employer). The circular explicitly states that establishments shall continue to disburse their share of the revised stipend rates, while the government share will be credited directly to apprentices’ bank accounts via DBT .

Legacy Framework vs. Current Position

Parameter	Legacy Position	Current Position (2026)	Practical Operational Impact
Legal Status of Apprentice	Apprentices treated as trainees, not workers under Section 18 of Apprentices Act, 1961	Same status continues under the Act	Apprentices are not employees for PF, ESI, or gratuity purposes
Stipend Classification	Often treated as salary income if linked to training or employment	Stipends linked to training are taxable as salary under the Income Tax Act	Tax liability arises at slab rates, not as scholarship exemption
Government DBT Share	Government reimbursement routed through employer	Government share paid directly to apprentice via DBT	DBT amount forms part of total stipend received and is taxable
Scholarship Exemption	Section 10(16) exemption for genuine scholarships	No change; scholarship exemption requires genuine scholarship purpose	Stipends are not automatically classified as scholarships for tax purposes
Statutory Exemptions	PF, ESI, and gratuity not applicable to apprentices	No change	Employer has no statutory social security contributions on stipends

Tax Treatment Under the Income Tax Act

Scholarship vs. Stipend: A Critical Distinction

The Income Tax Act, 1961 provides an exemption under Section 10(16) for scholarships granted to meet the cost of education. The exemption is available for genuine scholarships granted by universities, trusts, or government bodies to meet education costs. There is no monetary limit on this exemption.

However, the term “scholarship” has a specific legal meaning. A scholarship is generally understood as a grant or payment made to support a student’s education, typically awarded on the basis of academic merit or financial need. The key distinction is that a scholarship is not consideration for services rendered.

A stipend under the NATS, in contrast, is paid in consideration of the apprentice undergoing training and, contributing to the establishment’s work. The apprentice receives the stipend because they are engaged in a structured training program where they work under supervision and learn on the job. This is the fundamental difference that determines taxability.

The Madras High Court in Dr. V. Mahadev v. CIT (1990) considered whether a stipend received by a medical intern could be treated as a scholarship under Section 10(16). The Court held that amounts paid in the course of internship constituted remuneration for services rendered and were not scholarships. The deduction of tax at source by the hospital authorities strengthened the view that the amounts had been paid as salary and not by way of scholarship .

Taxability of Stipends

Stipends linked to employment or training are generally treated as salary income and are taxable at the applicable slab rate. The NATS stipend falls squarely within this category. The apprentice is engaged under a formal contract of apprenticeship, undergoes training, and receives a monthly stipend. The fact that 50% of the stipend is funded by the Government of India through DBT does not change the character of the receipt.

The Central Board of Direct Taxes has consistently taken the view that stipends paid to trainees, including apprentices, constitute income from salary or income from other sources, and are taxable accordingly. There is no specific exemption under the Income Tax Act for apprenticeship stipends.

CESTAT Ruling on Nature of Government Reimbursement

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal in India Nippon Electricals Ltd. v. Commissioner of GST & Central Excise (2026) addressed the character of the government’s 50% reimbursement. The Tribunal held that the reimbursement is akin to a statutory welfare grant rather than consideration for any taxable service. The Tribunal observed: “The stipend being paid by the appellant upfront, fifty percent of which when reimbursed by the Government, would be akin to a statutory grant as a welfare mandate under the Apprentices Act.”

This ruling relates to service tax liability on the employer for the reimbursement amount. It does not determine the income tax treatment of the stipend in the hands of the apprentice. The distinction is critical. The CESTAT ruling clarifies that the government’s 50% share is not commercial consideration for a service provided by the employer. However, from the apprentice’s perspective, the total stipend received (both employer and government shares) represents income for undergoing training. The CESTAT ruling has no bearing on the taxability of the stipend in the hands of the apprentice.

ITAT Raipur Decision on Section 10(16)

A recent decision of the ITAT Raipur allowed exemption under Section 10(16) towards a stipend, holding that the terms “scholarship” and “stipend” though different, serve one purpose and the stipend received was exempt under Section 10(16) . The assessee was a Super Speciality Trainee at a Hospital and Medical Research Centre, receiving a stipend during the three-year tenure of his course. The ITAT observed that the Revenue had not brought on record any distinction to demarcate “scholarship” and “stipend” for not granting exemption under Section 10(16).

However, this decision must be distinguished on facts. The assessee was a medical super-speciality trainee, and the payment was linked to an educational course requirement. The NATS stipend, by contrast, is paid to individuals who are placed in establishments for on-the-job training. While the ITAT Raipur decision indicates a liberal approach to Section 10(16) in cases where the payment is primarily for educational purposes, the Madras High Court’s decision in Dr. V. Mahadev remains binding authority for the proposition that payments for services rendered are not scholarships. The ITAT Raipur decision is fact-specific and does not establish a general rule that all stipends are exempt under Section 10(16).

Practical Implications for NATS Apprentices

Income Tax Liability

The total stipend received by a NATS apprentice, including both the employer’s 50% share and the government’s 50% DBT share, is taxable as income. For a Graduate Apprentice receiving ₹12,300 per month (₹1,47,600 per year), the entire amount must be disclosed as income from salary or income from other sources.

The apprentice must:

1. Include the total stipend received in their Income Tax Return
2. Pay tax at the applicable slab rate under the new tax regime or the old regime, whichever is chosen
3. Ensure that Form 16 is obtained from the employer if TDS is deducted.

TDS Obligations

The employer may be required to deduct tax at source (TDS) on the stipend paid to the apprentice under Section 192 of the Income Tax Act if the stipend exceeds the basic exemption limit. The employer’s share of the stipend is subject to TDS if the employee’s total income exceeds the exemption limit. The government’s DBT share is paid directly to the apprentice and may not attract TDS, but the apprentice is still liable to pay tax on the total amount.

The “Full-Time Employee” Trap

A significant compliance concern has emerged in recent years. Some employers have enrolled full-time employees under the NATS without obtaining written consent, then deducted the DBT amount from their salaries. This practice is illegal.

Section 7 of the Payment of Wages Act, 1936 prohibits deductions from wages without specific written authorisation. The DBT is the employee’s entitlement, not an adjustment tool. Employers who engage in this practice are exposed to liability under the Payment of Wages Act and the Apprentices Act .

Strategic Advisory for Employers and Apprentices [FREE]

For Employers

1. Ensure proper documentation and communication with apprentices. The contract of apprenticeship must clearly state the total stipend, the employer’s share, and the government’s DBT share.
2. Do not enroll full-time employees as apprentices without their explicit written consent. Doing so and deducting the DBT amount from salary is a violation of the Payment of Wages Act .
3. Issue Form 16 to apprentices if TDS is deducted on the employer’s share of the stipend.
4. Ensure that apprenticeship contracts are properly registered on the NATS portal. The establishment must register on nats.education.gov.in and manage contracts through the portal.
5. Maintain records of stipend payments, attendance, and training progress. The employer’s real obligations are operational: accurate onboarding data, timely stipend payment of its share, disciplined record-keeping on the portal, and clean contract closure.

For Apprentices

1. Do not assume the stipend is tax-free merely because 50% comes from the government. The entire stipend is taxable.
2. Maintain records of the total stipend received, including both employer and DBT portions.
3. If the employer deducts the DBT amount from your salary, raise a written complaint immediately. The deduction is prima facie impermissible.
4. File your Income Tax Return correctly and include the full stipend amount in your income.
5. If you are a student, explore whether any deductions are available under the Income Tax Act for education expenses. However, note that the stipend itself is not exempt under Section 10(16) as a matter of course.

Disclaimer: This guide constitutes statutory commentary and operational analysis based on notifications, rules, and judicial precedents published up to the current date in 2026. The information provided is for general informational purposes only and does not constitute formal legal advice or create a lawyer-client relationship. Tax laws are subject to frequent amendments and differing interpretations. You are strongly advised to consult a qualified tax professional to obtain advice specific to your factual circumstances before implementing any of the compliance strategies discussed herein. The authors and publishers assume no liability for any actions taken or not taken based on the contents of this publication.