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I am creating an application which uses a steganography algorithm. Now I can encrypt and decrypt text. But I want my application to ask for password after encrypting the text into the image, so that whenever someone will decrypt the image it would ask for the password for authentication. Is this even possible? If yes, how?

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Decrypt the text with a symmetric cypher like AES. To get the encryption key use a password based key derivation function (such as PBKDF2) on the password the user entered.

Then hide the encrypted text in your image using steganography.

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Yes - use a proper key derivation function.
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strictly speaking, steganography isn't encryption, it's simply an encoding. If you want the encoded message to be truly encrypted, then use a trusted algorithm (don't be tempted to invent one!). as Andre suggests in another answer, AES would be fine.

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Yes, it's possible. You can use any symmetric key algorithm, e.g. AES. But be sure the encoding/decoding isn't losing any bit.

I've used digital signature with QR codes before and it was changing some bits because it encoded them as ISO-8859-1. My solution was use Base64 before embed into the code. It required more space, but was safer.

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