Scholarship grants play a vital role in promoting education and human development in the Philippines. However, individuals, institutions, and corporations providing or receiving scholarships must comply with the rules and requirements set forth by the Bureau of Internal Revenue (BIR). This article comprehensively discusses the legal framework governing scholarship grants, their tax exemption status, and the reportorial obligations applicable to donors, educational institutions, and beneficiaries.

I. Legal Basis for Scholarship Tax Exemption

1. Constitutional and Statutory Foundations

The 1987 Philippine Constitution, Article XIV, Section 1, declares that the State shall protect and promote the right of all citizens to quality education and make such education accessible to all. To support this, various tax laws grant exemptions to scholarships and educational assistance.

The primary statute is the National Internal Revenue Code (NIRC) of 1997, as amended. Specifically, the relevant provisions include:

Section 32(B)(7)(f) – Exclusions from Gross Income: It provides that “scholarships grants and fellowship grants” are excluded from the gross income of the recipient, provided they are used for educational purposes and do not represent compensation for services.
Section 101(A)(2) – Exempt Gifts, Bequests, and Devises: Donations to educational institutions, provided they meet the conditions prescribed under the law, may also be exempt from donor’s tax.

II. Tax Treatment of Scholarships

1. For the Recipient (Scholar)

Under Section 32(B)(7)(f) of the NIRC, the scholarship grant received by a student is not subject to income tax, as long as the following conditions are met:

The grant is used exclusively for educational purposes, such as tuition, books, and school-related fees.
The grant is not a form of compensation for services rendered or to be rendered by the student to the grantor.
- For instance, a company-sponsored scholarship where the student must work for the company after graduation is not fully exempt if the scholarship is deemed payment for future services.

If the scholarship is tied to an employment contract or service obligation, the value of the scholarship may be treated as taxable income under Revenue Regulations No. 2-98, as amended.

2. For the Grantor (Donor or Sponsor)

Entities providing scholarships may benefit from certain tax advantages, depending on their nature and compliance with BIR regulations.

a. Individuals or Corporations

Under Section 34(H) of the NIRC, expenses for scholarships may be deductible from gross income if they qualify as legitimate business expenses—meaning they are ordinary, necessary, and directly related to the trade, business, or profession of the grantor.

However, if the grant is a charitable donation, it may instead fall under Section 34(H)(2) and Section 101(A)(2), which allow deduction or exemption from donor’s tax if the donee institution is accredited and non-profit.

b. Educational Institutions

Non-stock, non-profit educational institutions enjoy tax exemption under Article XIV, Section 4(3) of the Constitution and Section 30(H) of the NIRC, provided that:

No part of their income or asset inures to the benefit of any private individual.
Revenues and assets are used actually, directly, and exclusively for educational purposes.

When such institutions offer scholarships, these are treated as part of their educational mission and not subject to income tax or donor’s tax.

III. Documentary and Reporting Requirements

The BIR imposes documentation and reporting obligations to ensure the legitimacy of scholarship grants and to verify compliance with tax laws.

1. For the Grantor

Grantors (individuals, corporations, or educational institutions) must:

Execute a Scholarship Agreement This document specifies the terms of the grant, the purpose of the scholarship, and the conditions for continued support.
Maintain Accounting Records Proper books of account must reflect the amount of the scholarship and its disbursement to verify deductibility or exemption.
File Relevant BIR Returns
- If the scholarship is treated as a business expense, the deduction must be claimed in the Annual Income Tax Return (ITR).
- If the grant is a donation, the Donor’s Tax Return (BIR Form 1800) must be filed, unless exempt under Section 101.
Accreditation of Donee Institutions Donations to schools must be made to BIR-accredited donee institutions to qualify for tax exemption or deduction, in line with Revenue Regulations No. 13-98 and No. 1-2010.

2. For the Recipient

Scholars receiving grants are not required to file a return solely due to the scholarship. However, if they have other taxable income, they must include only that portion in their ITR, excluding the scholarship.

IV. Employer-Sponsored Scholarships

Scholarships given by employers to employees or their dependents have specific rules:

If the scholarship is granted to the employee, it is taxable if it is a form of compensation or benefit.
If granted to the employee’s dependent, it may be excluded from taxable income if the grant is:
- In accordance with a written educational assistance plan, and
- Not discriminatory or limited to highly paid employees.

These are governed by Revenue Regulations No. 2-98, Section 2.78.1(B)(2).

V. Compliance and Audit Considerations

The BIR may conduct audits to verify whether scholarship expenditures comply with legal and regulatory requirements. During audits, the following are often reviewed:

Existence of scholarship agreements.
Proof of payment (receipts, vouchers).
Beneficiary lists and records of fund usage.
Certification from the educational institution.

Failure to substantiate the scholarship as a genuine educational assistance may lead to disallowance of deductions or assessment of taxes and penalties.

VI. Penalties for Non-Compliance

Non-compliance with BIR reporting and documentation rules may result in:

Disallowance of deductions for the grantor.
Imposition of donor’s tax (if the donation is not exempt).
Surcharge and interest penalties under Sections 247–248 of the NIRC.
Possible revocation of accreditation for educational institutions found violating the “exclusive use” rule.

VII. Summary

Aspect	Tax Treatment	Key Requirements
Scholar (Recipient)	Exempt from income tax if used for education and not payment for services	Must not have service obligation
Donor/Grantor (Individual or Corporation)	Deductible as business expense or donation	Must substantiate with records; donee must be accredited
Non-Stock, Non-Profit Schools	Exempt from income and donor’s tax	Funds must be used exclusively for education
Employer-Granted Scholarships	May be taxable if linked to employment	Must comply with educational assistance plan rules

VIII. Conclusion

Scholarship grants, when properly structured, are generally tax-exempt under Philippine law. However, this exemption is conditional—strict documentation, compliance, and purpose alignment are essential. Both grantors and recipients must ensure that the scholarship’s design and implementation adhere to the BIR’s rules, the NIRC, and applicable revenue regulations. In essence, the tax system supports educational advancement, provided that scholarships genuinely serve their intended purpose: to educate, not to compensate.