How to Claim Exemption Under Section 10(16) of Income Tax Act in 2025-26?

Small businesses in India are stepping up to contribute to education in their own way, providing scholarships for children of employees, interns, and CSR-linked programmes. The provision of 10(16) of Income Tax Act ensures exemption of such scholarship funds from tax in the hands of the receiver. For business owners, this is important not only for compliance reasons, but for building goodwill amongst staff and the community. 

It is then helping to understand, in 2025-26, the process to manage these exemptions, to help SMEs support education without creating tax complications. This blog details the rules, eligibility, process, and tools that can help you with a smoother compliance process.

What is Section 10(16) of Income Tax Act?

Section 10(16) of Income Tax Act gives an exemption from taxation for the receipt of a scholarship for meeting the expenses of education. For small businesses, this is relevant when:

• Scholarships are given to the children of the employees.

• CSR activities include funding for students in the region.

• Professional firms arrange academic sponsorships for interns at the company.

In all of these cases, the exemption of the scholarship money is to make sure that the recipient does not count the scholarship money as taxable income.

Who Can Claim the Exemption?

Small businesses should understand that this exemption only applies to the student who receives the scholarship and not the business that provides this scholarship. However, as the provider of the scholarship with accounting software, SMEs must ensure correct documentation so employees and their families can apply for exemption without problems.

Those eligible to receive include:

• Scholarships for children of the active employees.

• Students supported under CSR education projects.

• Interns or apprentices are sponsored for further formal education.

Step-by-Step Process for Small Businesses

1. Draft Scholarship Policy

• Be clear about the criteria, amount, and purpose.

• Mention that money is only for education expenses.

2. Maintain Proper Documentation

• Publish letters that declare scholarship information.

• Save receipts of tuition and allied expenses.

3. Track Expenses Correctly

If you have scholarships and use regular payroll for expenses, use accounting software to track expenses.

4. Support Employee Claims

• Give certificates or letters that employees can attach at the time of filing ITR.

• Mention the exemption in Section 10 (16).

5. Compliance and Record Keeping

Use Accounting software to ensure that scholarship disbursements are recorded correctly and not confused with records regarding instances of salary or business incentives.

Mistakes Small Businesses Should Avoid

• Scholarship is treated as a part of the salary.

• Not keeping a record of the purpose of the scholarship.

• Ignoring requests for letters of support for employees

• Mixing of CSR donations and scholarship records

Here, GST billing software would play a role in providing transparency in scholarship-shangari CSR projects with proper invoices and records for financial reporting.

Practical Examples for SMEs

• Retail Business in Mumbai sponsored scholarships for children of shop assistants. It is under Section 10(16) of Income Tax Act, that it is meant that families could benefit from tax-free aid.

• IT Startup in Hyderabad: Offered Coding Course Scholarship to Interns. Through appropriate letters, the interns asserted full exemption without problems.

• Manufacturing Unit in Ludhiana, as CSR sponsored the local school students. The company used the MargBooks for student record management and ensured smooth compliance.

Key Rules for Businesses to Remember

• Scholarships are 100% exempt when the purpose is for educational purposes.

• Need to be reported as exempt income in the income tax return (ITR) of the recipient.

• Businesses have to maintain documentation in case they are taxed.

• Stipends or Allowances are not included under this exemption.

Bullet Summary:

• The exemption of the student and not the business practice.

• Provide sufficient and appropriate award letters.

• Keep financial records up-to-date.

• Report under the exempt income ITR.

Why Record-Keeping Matters for Small Businesses?

Scholarships may sound basic, but when tax notes report that records are lacking. Small businesses need to assure:

• Every Disbursement is duly recorded.

• Supporting documents are kept for at least 6 years.

• The scholarships associated with CSR are accounted for separately.

Using the MargBooks software helps in financial compliance by categorizing scholarships under the category of education-related expenses. It also helps in reporting, wherein summaries can be prepared at an instance, for auditors or tax officers.

For more robust financial management, businesses can use MargBooks’ reporting capabilities to manage numerous scholarships simultaneously without any transparency concerns. This takes on special importance when SMEs deal with scholarships for employees and CSR projects.

Conclusion

The 10(16) of income tax act is an important provision for small businesses to support education in the form of a scholarship. While the exemption has been beneficial to the students, SMEs play their own role in ensuring that compliance becomes a breeze by having proper policies and documentation in place. 

Awareness of the rules, avoiding the common mistakes, and using  MargBooks software for tracking, compliance, and reporting can help us save time and stress. Alongside the digital solutions for financial record maintenance, it helps ensure that small businesses not only fulfill their legal roles when it comes to taxes but also continue to make investments and education with no fear. For SMEs in 2025-26, knowing how to do is being able to get scholarships and achieve their true aim without taking unnecessary tax hurdles.