The answer to the question of scholarships being taxable is not as simple as many people think. You may require the assistance of a brilliant tax consultant to solve your problem. However, in this article I will try and simplify your tax problems relating to scholarship.

When I checked the website of IRS they mention that any fellowship or scholarship “either fully or partly” may or may not be tax free.

Fellowship grants and qualified scholarship are considered tax-free if they fulfil the following conditions

You must be a student in an educational institute for a degree course. Also the institute that you study in must have a regular faculty and a set curriculum. The institute must also have a regular body of students who attend the institute on a regular basis.

Make sure the amount that you receive as scholarship is used to for tuition fee, books and other supplies that you require to complete your education in the institute.

However IRS includes the scholarship received in your gross total income because IRS considers such scholarships as amount received for paying incidental expenses.

Your incidental expenses include expenses incurred on boarding, travelling, your room expenses, expenses incurred in purchase of equipment and all other expenses that you incur to get an education. So any amount that you receive to pay for your incident expenses is taxable.

However, there are certain exceptions to this rule. Any amount received under National Health Service Corps Scholarship program or Financial Assistance program or the Armed Forces Health Professions Scholarship is not taxable.

If you have any further doubts you can read the IRS Publication 970 which deals with tax benefits on education.