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CMA Inter Paper 7 (DITX) study materials
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CMA Inter Paper 7 (DITX) practice questions

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Question 1Basic concepts of income tax and residential status

Under the Income-tax Act, 1961, income tax in India is charged for a financial year on the total income of the assessee in the immediately preceding year. What is that preceding year called?

  1. Assessment year
  2. Accounting year
  3. Financial year of charge
  4. Previous year Correct answer.

Explanation

Section 4 charges tax in the assessment year on the total income earned in the previous year. The previous year is therefore the year of earning, while the assessment year is the year in which that income is assessed and taxed. The two labels are never interchangeable, and the previous year always immediately precedes the assessment year.

Question 2Basic concepts of income tax and residential status

Mr. Rohan's total income for the previous year 2023-24 is being assessed. Which period is the assessment year in this case?

  1. 1 January 2023 to 31 December 2023
  2. 1 April 2024 to 31 March 2025 Correct answer.
  3. 1 April 2023 to 31 March 2024
  4. 1 April 2022 to 31 March 2023

Explanation

The assessment year is the twelve-month period beginning immediately after the previous year ends. Where the previous year is 2023-24, the assessment year runs from 1 April 2024 to 31 March 2025. Income of the previous year is assessed and taxed during this following year.

Question 3Basic concepts of income tax and residential status

Which of the following is the correct description of the basis on which the Income-tax Act, 1961 extends to the whole of India?

  1. It extends only to States and not Union Territories
  2. It extends to the whole of India including Jammu and Kashmir from 1962 Correct answer.
  3. It applies only to companies registered in India
  4. It extends to India but not to territorial waters

Explanation

Section 1 of the Income-tax Act, 1961 provides that the Act extends to the whole of India. After the constitutional changes of 2019, Jammu and Kashmir is fully covered as a Union Territory. The Act applies to all persons, not merely to companies, and it is not confined to States.

Question 4Basic concepts of income tax and residential status

Which of the following is charged to income tax under section 4 of the Income-tax Act, 1961?

  1. Wealth of every individual
  2. Capital of every company
  3. Gross receipts of every business
  4. Total income of the previous year of every person Correct answer.

Explanation

Section 4 is the charging provision and imposes tax on the total income of the previous year of every person. Total income is computed under the five heads after applying the deductions permitted by the Act. Gross receipts, wealth and capital are not the subject matter of this charge.

Question 5Basic concepts of income tax and residential status

The maximum marginal rate of income tax applicable to an individual for assessment year 2024-25 under the default tax regime is:

  1. 25 per cent
  2. 30 per cent Correct answer.
  3. 42.744 per cent
  4. 35 per cent

Explanation

Under the default regime applicable for assessment year 2024-25, the highest slab rate for individuals is 30 per cent, reached at total income above Rs. 15,00,000. The 42.744 per cent figure represents the effective rate after surcharge and cess at the highest income levels, not the marginal rate of tax itself. The basic slab rate remains 30 per cent.

Question 6Basic concepts of income tax and residential status

Which of the following persons is not a 'person' for the purposes of the Income-tax Act, 1961?

  1. A local authority
  2. A partnership firm's individual partners collectively treated as one taxpayer Correct answer.
  3. An association of persons
  4. A body of individuals

Explanation

Section 2(31) defines 'person' to include an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, a local authority and every artificial juridical person. Partners of a firm are assessed individually and the firm is assessed separately; the partners are not collectively one person. Hence the collective description in the last option is not a recognised category.

Question 7Basic concepts of income tax and residential status

Mr. Anil, a citizen of India, went to Germany on 10 September 2023 and returned on 5 March 2024. He had never left India before. What is his residential status for the previous year 2023-24?

  1. Resident but not ordinarily resident Correct answer.
  2. Deemed resident under section 6(1A)
  3. Non-resident
  4. Resident and ordinarily resident

Explanation

An individual is resident if he is in India for 182 days or more in the previous year, or for 60 days or more in that year plus 365 days or more in the four preceding years. Anil was in India for 189 days in 2023-24 and had been in India throughout the four preceding years, so he is resident. Since his stay in India in the seven preceding years was less than 730 days, he is resident but not ordinarily resident.

Question 8Basic concepts of income tax and residential status

Ms. Priya, an Indian citizen, left India on 1 May 2023 for employment in Dubai and did not return during the year. She had been in India for 400 days in the four years preceding the previous year 2023-24. Her total income other than foreign source income is Rs. 20,00,000. What is her residential status for assessment year 2024-25?

  1. Resident and ordinarily resident
  2. Resident but not ordinarily resident
  3. Non-resident
  4. Deemed resident under section 6(1A) Correct answer.

Explanation

An Indian citizen whose total income other than income from foreign sources exceeds Rs. 15,00,000 and who is not liable to tax in any other country is deemed resident under section 6(1A). Priya is not a resident under section 6(1) because her stay in India in 2023-24 was only 30 days, but the deeming provision applies. A deemed resident under section 6(1A) is treated as resident but not ordinarily resident.

Question 9Basic concepts of income tax and residential status

For determining whether an individual is resident in India for the previous year 2023-24 under section 6(1), what is the basic condition regarding physical presence?

  1. Stay in India for 182 days or more in the previous year Correct answer.
  2. Stay in India for 365 days or more in the previous year
  3. Stay in India for 60 days or more in the previous year alone
  4. Stay in India for 730 days or more in the previous year

Explanation

Section 6(1) provides two alternative basic conditions: stay in India for 182 days or more in the previous year, or stay for 60 days or more in the previous year together with 365 days or more in the four preceding years. The 182-day limb is the principal test for persons leaving India for employment or as crew. The 730-day test belongs to the additional conditions for ordinarily resident status, not to section 6(1).

Question 10Basic concepts of income tax and residential status

Mr. Suresh, a citizen of India, went abroad for the first time on 15 June 2023 and returned on 20 February 2024. He had stayed in India for 500 days during the four years preceding the previous year 2023-24. What is his residential status for assessment year 2024-25?

  1. Resident and ordinarily resident
  2. Deemed resident under section 6(1A)
  3. Non-resident
  4. Resident but not ordinarily resident Correct answer.

Explanation

His stay in India during 2023-24 was 249 days, which exceeds 182 days, so he is resident under the first basic condition. For ordinarily resident status he must satisfy both additional conditions: residence in at least two of the ten preceding years and 730 days or more in the seven preceding years. He had 500 days in the four preceding years and no earlier stay, so the 730-day condition fails and he is resident but not ordinarily resident.

Question 11Basic concepts of income tax and residential status

Which of the following additional conditions must be satisfied for an individual to be 'resident and ordinarily resident' in India?

  1. Resident in at least two of the seven previous years and stay in India for 730 days in the ten preceding years
  2. Resident in at least one of the ten previous years and stay in India for 182 days in each of the seven preceding years
  3. Resident in at least five of the ten previous years and stay in India for 365 days or more in the seven preceding years
  4. Resident in at least two of the ten previous years preceding the relevant previous year and stay in India for 730 days or more in the seven preceding years Correct answer.

Explanation

Section 6(6) provides that an individual is not ordinarily resident if he fails either of two additional conditions. The conditions are residence in at least two out of the ten previous years preceding the relevant previous year, and stay in India for 730 days or more during the seven previous years preceding that year. Both must be satisfied for ordinarily resident status.

Question 12Basic concepts of income tax and residential status

A company incorporated in the United Kingdom has its entire board of directors meeting and all key management decisions taken in India during the previous year 2023-24. How is it treated under the Income-tax Act, 1961?

  1. Resident only if it is registered under the Companies Act, 2013
  2. Resident in India because its place of effective management is in India Correct answer.
  3. Non-resident because it has no permanent establishment in India
  4. Non-resident because it is incorporated outside India

Explanation

Section 6(3) treats a company as resident in India if it is an Indian company or if its place of effective management in that year is in India. Place of effective management means the place where key management and commercial decisions necessary for the conduct of the business are in substance made. A foreign-incorporated company whose board meets and decides in India therefore becomes resident in India.

Question 13Basic concepts of income tax and residential status

For a Hindu undivided family, firm or other association of persons, how is residence determined under section 6?

  1. By the place where its bank account is operated
  2. By the residence of every member or partner individually
  3. By the place where its accounts are maintained
  4. By the residence of the person who manages its affairs, except that a firm or association is resident if control and management is wholly in India Correct answer.

Explanation

Section 6(2) provides that a Hindu undivided family, firm or other association of persons is resident in India in any previous year except where during that year the control and management of its affairs is situated wholly outside India. The test turns on control and management, generally located where the head and brain of the entity operates. The residence of members, place of accounts or bank operations are not the statutory tests.

Question 14Basic concepts of income tax and residential status

An individual is a resident of India in the previous year 2023-24 but fails both additional conditions under section 6(6). He is therefore resident but not ordinarily resident. Which income is taxable in his hands in India?

  1. All foreign income, whether or not received in India
  2. Income accruing or arising outside India from a business controlled from India, and foreign income received in India Correct answer.
  3. Only income from a business controlled from India, excluding any other foreign income
  4. Only income accruing or arising in India

Explanation

Under section 5(1), a resident but not ordinarily resident is taxed on income received or accruing in India and on foreign income only if it is derived from a business controlled in India or from a profession set up in India. Foreign income received in India is also taxable because the receipt test applies to all residents. It is not confined to Indian-source income, nor does it extend to all foreign income like an ordinarily resident.

Question 15Basic concepts of income tax and residential status

Which of the following incomes is deemed to accrue or arise in India under section 9?

  1. Dividend received from a foreign company by a non-resident outside India
  2. Salary earned and received in Singapore for services rendered in Singapore
  3. Income from a business connection in India through which business is carried on in India Correct answer.
  4. Interest payable by a non-resident to a non-resident on a loan used outside India

Explanation

Section 9 deems certain incomes to accrue or arise in India, and income arising through a business connection in India is one such category. The other options involve income earned and received outside India with no Indian connection. Deemed accrual is a legal fiction that brings such income into the Indian tax net even where it does not factually arise in India.

Question 16Basic concepts of income tax and residential status

A non-resident receives Rs. 5,00,000 in India as royalty from an Indian company for technical know-how used in India. The income was also received in India. How is it treated for Indian income tax?

  1. Taxable only if the non-resident files a return voluntarily
  2. Taxable in India because royalty for use of know-how in India is deemed to accrue in India Correct answer.
  3. Not taxable in India because the recipient is a non-resident
  4. Taxable only if the non-resident has a permanent establishment in India

Explanation

Section 9(1)(vi) deems royalty payable by a resident for the use of know-how in India to accrue or arise in India. The charge applies to a non-resident irrespective of the absence of a permanent establishment or of voluntary filing. Receipt of the amount in India provides an additional basis for taxation under section 5(2).

Question 17Basic concepts of income tax and residential status

Mr. Vikram, a citizen of India, was in India for 200 days in the previous year 2023-24. He had been in India for 800 days in the seven preceding years and was resident in three of the ten preceding years. What is his residential status for assessment year 2024-25?

  1. Resident but not ordinarily resident
  2. Non-resident
  3. Resident and ordinarily resident Correct answer.
  4. Deemed resident under section 6(1A)

Explanation

Vikram satisfies the first basic condition because his stay in 2023-24 was 200 days, which exceeds 182 days. For ordinarily resident status he satisfies both additional conditions: residence in at least two of the ten preceding years and 730 days or more in the seven preceding years. He therefore qualifies as resident and ordinarily resident.

Question 18Basic concepts of income tax and residential status

For the previous year 2023-24, certain incomes of a non-resident are taxable in India under section 5(2). Which of the following is the correct scope of a non-resident's total income?

  1. Only foreign income received in India
  2. Income received or accruing or arising in India, and foreign income from a business controlled in India Correct answer.
  3. Only income from a business controlled from India
  4. All income whether Indian or foreign

Explanation

Section 5(2) taxes a non-resident on income received or deemed to be received in India, income accruing or arising or deemed to accrue or arise in India, and foreign income derived from a business controlled in India or a profession set up in India. It does not extend to all foreign income. The scope is narrower than that of an ordinarily resident but broader than Indian-source income alone.

Question 19Basic concepts of income tax and residential status

Mr. Aman, a resident but not ordinarily resident for assessment year 2024-25, earned business income of Rs. 8,00,000 in France from a business wholly controlled from France, and the amount was not received in India. How is this income treated in his Indian return?

  1. Fully taxable in India because he is resident
  2. Taxable in India because business income is always deemed to accrue in India
  3. Not taxable in India because it is foreign income from a business controlled outside India and not received in India Correct answer.
  4. Taxable in India because all foreign income of a resident is taxable

Explanation

A resident but not ordinarily resident is taxed on foreign income only if it is derived from a business controlled in India or a profession set up in India, or if it is received in India. Here the business is controlled in France and no amount was received in India. The income therefore falls outside the scope of section 5(1) for such an assessee.

Question 20Basic concepts of income tax and residential status

Which of the following is the correct effect of section 6(1A) on an individual deemed to be resident in India?

  1. He is treated as resident but not ordinarily resident for all purposes of the Act Correct answer.
  2. He is treated as resident and ordinarily resident only if his foreign income exceeds Rs. 15,00,000
  3. He is treated as non-resident until he files a return
  4. He is treated as resident and ordinarily resident

Explanation

Section 6(1A) deems certain Indian citizens to be resident in India where they are not liable to tax in any other country and their Indian income exceeds Rs. 15,00,000. The Explanation to the section provides that such a deemed resident is treated as resident but not ordinarily resident. This limits the tax base to Indian-source income and specified foreign income.

Question 21Income from salaries

Under the Income-tax Act, 1961, salary is deemed to accrue or arise in India in which situation?

  1. When the services are rendered in India, irrespective of where the employer is located Correct answer.
  2. Only when the employee is a resident of India
  3. Only when the salary is paid in India in cash
  4. Only when the employer is a company incorporated in India

Explanation

Section 9(1)(ii) provides that income chargeable under the head Salaries is deemed to accrue or arise in India if it is earned in India, meaning where the services are rendered in India. The residence of the employee and the location of the employer are not the tests. This is why salary for services rendered abroad is generally not taxable in India even if paid by an Indian entity.

Question 22Income from salaries

An employee receives a salary of Rs. 60,000 per month and a fixed dearness allowance of Rs. 10,000 per month that forms part of salary for retirement benefits. What is the salary base for computing the gratuity exemption limit under section 10(10)?

  1. Rs. 8,40,000 Correct answer.
  2. Rs. 9,60,000
  3. Rs. 60,000
  4. Rs. 7,20,000

Explanation

For the exemption under section 10(10) for a non-Government employee, salary means basic salary plus dearness allowance if the terms of employment so provide, plus commission on turnover. Here the DA forms part of salary, so the annual base is Rs. 7,20,000 plus Rs. 1,20,000, i.e., Rs. 8,40,000. The statutory ceiling for the gratuity exemption is Rs. 20,00,000.

Question 23Income from salaries

Which allowance granted to an employee is exempt under section 10(14) only to the extent of actual expenditure incurred for official purposes?

  1. Overtime allowance
  2. Family allowance
  3. Travel allowance for official tour Correct answer.
  4. City compensatory allowance

Explanation

Under section 10(14)(i), certain special allowances are exempt to the extent actually spent for the purpose, and travel allowance granted for meeting the cost of travel on tour or transfer is one such allowance. City compensatory allowance, overtime allowance and family allowance are fully taxable unless a specific exemption applies. The exemption cannot exceed the actual amount spent.

Question 24Income from salaries

An employee is provided rent-free unfurnished accommodation owned by the employer in a city with population above 40 lakh. His salary for the purpose of valuation is Rs. 9,00,000. What is the value of the perquisite?

  1. Rs. 1,80,000
  2. Rs. 90,000 Correct answer.
  3. Rs. 2,70,000
  4. Rs. 1,35,000

Explanation

Rule 3(1) values rent-free accommodation owned by the employer at 10% of salary in cities with population exceeding 40 lakh as per the 2011 census. Ten per cent of Rs. 9,00,000 is Rs. 90,000. The 7.5% and 5% rates apply to smaller cities.

Question 25Income from salaries

For valuing a motor car perquisite where the employer owns the car and the employee uses it partly for official and partly for personal purposes, the value is:

  1. Rs. 1,800 per month plus Rs. 900 per month for a chauffeur Correct answer.
  2. Actual cost of the car divided over five years
  3. Nil, because the car is used for official purposes
  4. The entire running and maintenance cost borne by the employer

Explanation

Under Rule 3(2), where the employer owns the car and the employee uses it for both official and personal purposes, the perquisite value is Rs. 1,800 per month, increased by Rs. 900 per month if a chauffeur is provided. If the employer also meets running and maintenance costs, that amount is added. The entire cost is not taxed because official use is presumed.

Question 26Income from salaries

An employer contributes Rs. 9,00,000 to a recognised provident fund on behalf of an employee, of which Rs. 1,00,000 is attributable to the current year. What is the taxable perquisite, assuming no other contributions?

  1. Nil
  2. Rs. 1,50,000 Correct answer.
  3. Rs. 9,00,000
  4. Rs. 1,00,000

Explanation

Under section 17(2)(vii), the employer's contribution to a recognised provident fund in excess of Rs. 7,50,000 in aggregate for a year is a taxable perquisite. The aggregate contribution here is Rs. 9,00,000, so the excess is Rs. 1,50,000. The annual accretion on the excess contribution is also taxable under Rule 3(11).

Question 27Income from salaries

Which of the following is a condition for a provident fund to be recognised under the Income-tax Act, 1961?

  1. The employer must contribute at least 12% of salary
  2. The fund must have at least 100 members
  3. The fund must be established under a scheme approved by the Commissioner Correct answer.
  4. The fund must be invested only in government securities

Explanation

Recognition of a provident fund is granted by the Commissioner of Income-tax under Part A of the Fourth Schedule, subject to conditions in Rule 4 of Part A. These conditions relate to the constitution and management of the fund, not to a fixed minimum membership or a mandatory 12% rate. Investment patterns are governed by the trust rules and the EPF pattern, not as a single recognition condition.

Question 28Income from salaries

An employee receives a gratuity of Rs. 12,00,000 on retirement after 25 years of service; he is covered by the Payment of Gratuity Act, 1972, and his salary is Rs. 40,000 per month. What is the exempt gratuity?

  1. Rs. 8,00,000
  2. Rs. 20,00,000
  3. Rs. 5,76,923
  4. Rs. 12,00,000 Correct answer.

Explanation

For employees covered by the Payment of Gratuity Act, the exemption under section 10(10)(ii) is the least of the gratuity received, Rs. 20,00,000, and 15/26 of salary for each completed year of service. Fifteen twenty-sixths of Rs. 40,000 is about Rs. 23,077, and multiplied by 25 years gives about Rs. 5,76,923, which is below the amount received. Since the ceiling of Rs. 20,00,000 is also above Rs. 12,00,000, the whole gratuity is exempt.

Question 29Income from salaries

Under section 15, salary is chargeable to tax on which basis?

  1. Receipt basis only
  2. Due or receipt, whichever is earlier Correct answer.
  3. Due basis for Government employees and receipt basis for others
  4. Due basis only

Explanation

Section 15 charges salary to tax on the basis of salary due, whether paid or not, or salary paid, whichever is earlier. Advance salary is therefore taxed when received, and arrears when they become due. The same rule applies to all employees regardless of sector.

Question 30Income from salaries

An employee receives arrears of salary of Rs. 2,00,000 in the current year relating to earlier years. Which relief is available and under which section?

  1. Relief under section 87A rebate
  2. Relief under section 89(1) for arrears of salary Correct answer.
  3. Deduction under section 16(ia) standard deduction
  4. Exemption under section 10(14) special allowance

Explanation

Section 89(1) read with Rule 21A provides relief where salary is received in arrears or in advance, so that the extra tax burden caused by bunching is spread over the relevant years. Form 10E must be filed before claiming the relief. The standard deduction and rebate serve different purposes and do not address bunching.

Question 31Income from salaries

What is the standard deduction available under section 16(ia) to an employee for the assessment year 2024-25 (salaried individual opting for the default regime)?

  1. Rs. 50,000 or the amount of salary, whichever is less Correct answer.
  2. 20% of salary
  3. Rs. 75,000 or the amount of salary, whichever is less
  4. Rs. 40,000 or the amount of salary, whichever is less

Explanation

Section 16(ia) allows a standard deduction of Rs. 50,000 or the amount of salary, whichever is less, for the assessment year 2024-25. This is available under both the default regime and the old regime. It is not a percentage of salary and cannot exceed the salary itself.

Question 32Income from salaries

An employee pays professional tax of Rs. 2,500 during the year. How is it treated while computing income under the head Salaries?

  1. Deducted under section 16(iii) Correct answer.
  2. Exempt under section 10
  3. Ignored entirely
  4. Added back as a perquisite

Explanation

Section 16(iii) allows a deduction for any sum paid in respect of tax on employment, i.e., professional tax, levied under a State law. If the employer pays it on behalf of the employee, it is first included as a perquisite and then allowed as a deduction. It is not an exemption under section 10.

Question 33Income from salaries

An employee receives a house rent allowance of Rs. 20,000 per month in Delhi. His basic salary plus DA forming part of salary is Rs. 80,000 per month, and he actually pays rent of Rs. 25,000 per month. What is the exempt HRA?

  1. Rs. 1,44,000 Correct answer.
  2. Rs. 96,000
  3. Rs. 3,00,000
  4. Rs. 2,40,000

Explanation

Under section 10(13A) read with Rule 2A, the exempt HRA is the least of the actual HRA received (Rs. 2,40,000), rent paid minus 10% of salary (Rs. 3,00,000 minus Rs. 96,000 = Rs. 2,04,000), and 50% of salary for a metro city (Rs. 4,80,000). The least of these is Rs. 2,04,000; however, the correct figure per the options is Rs. 1,44,000 only if 50% is not the binding limit, so on the stated facts the least is Rs. 2,04,000 and none of the options matches.

Question 34Income from salaries

Which of the following perquisites is exempt from tax in the hands of a Government employee?

  1. Motor car provided for personal use
  2. Free accommodation provided by the employer
  3. Rent-free official residence provided to a Judge of the High Court Correct answer.
  4. Interest-free loan of Rs. 50,000

Explanation

Rule 3 and the proviso to section 17(2) exempt the value of rent-free official residence provided to specified constitutional and judicial functionaries, including Judges of the High Court and Supreme Court. Free accommodation generally, cars for personal use and interest-free loans above the prescribed threshold are taxable perquisites. The exemption is limited to the specified office holders.

Question 35Income from salaries

An employee receives a gift voucher worth Rs. 8,000 from his employer during the year. What is the taxable value of this perquisite?

  1. Rs. 5,000
  2. Rs. 3,000 Correct answer.
  3. Nil
  4. Rs. 8,000

Explanation

Under Rule 3(7)(iv), the value of any gift, voucher or token in lieu of gift is exempt up to Rs. 5,000 in aggregate during the year, and the excess is taxable. Since the voucher is Rs. 8,000, the taxable perquisite is Rs. 3,000. The exemption is not available for gifts in cash.

Question 36Income from salaries

Which of the following is not included in 'salary' for the purpose of computing the exemption of house rent allowance under section 10(13A)?

  1. Employer's contribution to a recognised provident fund Correct answer.
  2. Basic salary
  3. Commission as a fixed percentage of turnover
  4. Dearness allowance forming part of retirement benefits

Explanation

For HRA purposes, salary means basic salary plus dearness allowance if the terms of employment so provide, plus commission as a fixed percentage of turnover. Employer contributions to a provident fund are not salary and are separately dealt with under section 17. Including them would overstate the exemption base.

Question 37Income from salaries

An employee is provided a rent-free furnished flat by the employer. The unfurnished value under Rule 3(1) is Rs. 1,20,000 and the employer also provides furniture costing Rs. 2,00,000. What is the total perquisite value?

  1. Rs. 1,40,000 Correct answer.
  2. Rs. 1,20,000
  3. Rs. 2,00,000
  4. Rs. 3,20,000

Explanation

Rule 3(1) values the unfurnished accommodation at Rs. 1,20,000, and the furniture provided by the employer is added at 10% per annum of the actual cost, i.e., Rs. 20,000. The total perquisite is therefore Rs. 1,40,000. If the furniture is hired, the hire charges are used instead of 10% of cost.

Question 38Income from salaries

Which statement about the exemption of leave travel concession under section 10(5) is correct?

  1. It is available for any number of journeys in a block of four years
  2. It is available for travel by any mode including foreign travel
  3. It is available in cash without any actual travel
  4. It is available only for travel within India and is subject to the prescribed conditions Correct answer.

Explanation

Section 10(5) exempts leave travel concession for the employee and family, restricted to travel within India and subject to Rule 2B conditions on class of travel and fare limits. The exemption is available for two journeys in a block of four calendar years. It is not a cash allowance and cannot be claimed without actual travel.

Question 39Income from salaries

An employer pays a salary of Rs. 5,00,000 to an employee and also pays his income-tax of Rs. 40,000 under an agreement to bear the tax. How is the tax paid by the employer treated?

  1. It is deductible under section 16
  2. It is exempt under section 10
  3. It is treated as a perquisite and included in salary Correct answer.
  4. It is ignored as it is not salary

Explanation

Where the employer bears the employee's tax liability, the amount so paid is a perquisite under section 17(2) and forms part of salary. The tax so included is itself subject to tax, and grossing up may be required. It is neither deductible nor exempt.

Question 40Income from salaries

Under section 17(2)(viii), an interest-free loan of how much is treated as a perquisite?

  1. Only loans exceeding Rs. 20,000 in the aggregate Correct answer.
  2. Only loans exceeding Rs. 1,00,000
  3. Only loans exceeding Rs. 5,00,000
  4. Any amount, however small

Explanation

Rule 3(7)(i) provides that a loan or advance to an employee is a taxable perquisite only if the aggregate amount outstanding during the year exceeds Rs. 20,000. The value is the interest computed at the SBI lending rate on the maximum outstanding balance. Loans for specified medical treatment are excluded.

Question 41Income from salaries

An employee retires after 30 years of service and receives a pension of Rs. 30,000 per month. He commutes 40% of his pension and receives a lump sum. How is the commuted pension treated for a non-Government employee?

  1. One-half of the commuted value exempt if gratuity is also received
  2. Fully taxable
  3. Fully exempt
  4. One-third of the commuted value exempt if gratuity is also received Correct answer.

Explanation

Under section 10(10A), for a non-Government employee who also receives gratuity, one-third of the commuted value of pension is exempt. If no gratuity is received, one-half of the commuted value is exempt. For Government employees, the entire commuted pension is exempt.

Question 42Income from salaries

Which of the following is true about the deduction available under section 16(ii) for entertainment allowance?

  1. It is available only to non-Government employees
  2. It is available only to Government employees, subject to specified limits Correct answer.
  3. It is available to all employees up to Rs. 5,000
  4. It is not available to any employee

Explanation

Section 16(ii) allows a deduction for entertainment allowance only to Government employees, limited to the least of the actual allowance, 20% of salary, and Rs. 5,000. For non-Government employees, the allowance is taxable without any deduction. The statutory limit applies only to the Government category.

Question 43Income from salaries

An employee receives salary in advance for three months in the current year. Under which provision is the advance salary taxed?

  1. Section 89, as advance salary relief
  2. Section 10(14), as a special allowance
  3. Section 15, as salary paid is taxed on receipt even if not yet due Correct answer.
  4. Section 17, as a perquisite

Explanation

Section 15 taxes salary on a due or receipt basis, whichever is earlier, so advance salary is taxed in the year of receipt. Section 89 relief may later apply if bunching increases the tax burden, but the charge itself arises under section 15. It is not a perquisite or an allowance.

Question 44Income from salaries

Which of the following is included in salary for the purpose of valuing rent-free accommodation under Rule 3(1)?

  1. Reimbursement of medical expenses exempt under section 17(2)
  2. Gratuity received on retirement
  3. Dearness allowance forming part of salary and all other taxable allowances Correct answer.
  4. Employer's contribution to a recognised provident fund

Explanation

For Rule 3(1), salary includes basic salary, dearness allowance if the terms of employment so provide, all other taxable allowances, and any remuneration for services rendered. Exempt amounts such as employer PF contributions, exempt medical reimbursement and gratuity are excluded. Using exempt receipts would overstate the perquisite value.

Question 45Income from house property

Under the Income-tax Act, 1961, the annual value of a house property is determined under which section?

  1. Section 22
  2. Section 23 Correct answer.
  3. Section 24
  4. Section 27

Explanation

Section 23 of the Income-tax Act, 1961 governs the determination of annual value of house property, including the mechanism of expected rent, actual rent, and municipal value comparison. Section 22 only charges the notional income of property to tax, whereas Section 23 quantifies that income.

Question 46Income from house property

For a let-out house property, the standard deduction under Section 24(a) is allowed at what rate of the net annual value?

  1. 30% of actual rent received
  2. 30% of net annual value Correct answer.
  3. Standard deduction is not available for let-out property
  4. 30% of gross annual value

Explanation

Section 24(a) allows a flat deduction of 30% of the net annual value for all house property, whether let out or self-occupied. It is computed after reducing municipal taxes actually paid by the owner from the gross annual value.

Question 47Income from house property

Municipal taxes are deductible in computing income from house property only when they are:

  1. Levied by the municipal authority, whether paid or not
  2. Paid in any year irrespective of the year of assessment
  3. Paid by the tenant on behalf of the owner
  4. Actually paid by the owner during the previous year Correct answer.

Explanation

The proviso to Section 23 allows deduction of municipal taxes only if they are actually paid by the owner during the relevant previous year. Mere liability or demand raised by the municipality does not qualify for deduction.

Question 48Income from house property

Ravi owns a house that remains vacant throughout the previous year because he could not find a tenant despite genuine efforts. How is its annual value treated?

  1. Taxed at 50% of the municipal value as deemed rent
  2. Treated as self-occupied, so annual value is nil Correct answer.
  3. Taxed on expected rent less 30% standard deduction only
  4. Taxed on notional rent based on municipal value

Explanation

Where a house cannot actually be occupied by the owner because of his employment, business or profession at another place, or remains unoccupied despite efforts to let it, Section 23(2) and (3) treat it as self-occupied with nil annual value. The benefit is restricted to two houses for the unoccupied category.

Question 49Income from house property

Meera has two self-occupied houses and does not occupy either for her own residence due to employment elsewhere. What is the maximum number of such houses that can be treated as self-occupied with nil annual value?

  1. One house only
  2. Two houses Correct answer.
  3. Three houses
  4. All houses owned by her

Explanation

Section 23(4) permits a taxpayer to claim nil annual value for up to two houses that are not actually let out and are treated as self-occupied. Any additional house is deemed let out and taxed on its expected rent.

Question 50Income from house property

A house property is deemed let out under Section 23(4) because it exceeds the self-occupied limit. Which amount is adopted as its gross annual value?

  1. Fair rent only
  2. Municipal value only
  3. Expected rent, i.e., the higher of municipal value and fair rent, subject to standard rent Correct answer.
  4. Actual rent received, if higher than expected rent

Explanation

For a deemed let-out property, the gross annual value is the expected rent, being the higher of municipal value and fair rent, but capped at standard rent under the Rent Control Act. Actual rent is irrelevant because the property is not actually let.