Taxation - DT Ch 03: Salaries - Test 1: answer key

Question 1 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Vikramaditya Tech Labs LLP employs Mr. Arjun Mehta as a product director throughout tax year 2026-27. Arjun has no income from business or profession and has not exercised the option to leave the default tax regime. Under his appointment terms, basic pay is ₹80,000 per month from 1 April 2026 to 30 September 2026 and ₹90,000 per month from 1 October 2026 to 31 March 2027. Dearness allowance is 10% of monthly basic pay and does not form part of salary for retirement benefits. The LLP credits an entertainment allowance of ₹5,000 each month. Arjun works entirely at the LLP's Gurugram office and does not receive HRA or any duty-related reimbursement. During the year, ₹2,500 of professional tax is deducted from his salary and remitted by him through payroll. Separately, the LLP settles another ₹2,400 of Arjun's professional tax liability directly with the State authority on 31 March 2027; this amount is not recovered from him. The payroll team has treated the employer-paid amount as a non-cash benefit but has not added it to taxable salary. Arjun argues that his own payment should be deducted and that the entertainment allowance should also reduce taxable salary because he spent it on client hospitality. His HR manager proposes one standard deduction for each of the two salary-rate periods. The salary and allowances were credited on the last working day of each month, and both tax payments relate to tax year 2026-27. His service continued without interruption, and no reimbursement was made against the entertainment allowance. Assume there are no other receipts, perquisites, exemptions or deductions, and determine the correct salary computation applying the default regime for the entire tax year.

What is the standard deduction admissible to Arjun for tax year 2026-27, assuming the default tax regime applies throughout the year?

1. ₹50,000, being the standard deduction under the normal regime.
2. ₹75,000, since his annual salary exceeds the prescribed ceiling. (correct answer)
3. ₹60,000, calculated with reference to the two salary periods.
4. ₹1,02,000, equal to his aggregate basic salary.

Answer: B — ₹75,000, since his annual salary exceeds the prescribed ceiling.

Explanation. Under section 19(1), Table SI No. 2, the standard deduction under section 202(1) is the lower of ₹75,000 and salary. Arjun's basic salary is ₹80,000 × 6 + ₹90,000 × 6 = ₹10,20,000. His salary is therefore higher than the statutory ceiling. The admissible deduction is ₹75,000 for the tax year. The increase in basic salary during October does not create a separate deduction for each salary period.

Where it goes wrong. Calculating the standard deduction separately for the two salary-rate periods or applying the normal-regime ceiling of ₹50,000.

Authority. Section 19(1), Table SI No. 2 of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

Question 2 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Arjun's payroll records show ₹2,500 of professional tax paid by him and ₹2,400 discharged directly by his employer. What is the correct treatment under the default regime?

1. Deduct ₹2,500 and disregard the amount settled by the employer.
2. Deduct ₹2,400 because direct payment is not a salary benefit.
3. Include ₹2,500 as salary and deduct the employer's payment.
4. Include ₹2,400 as a taxable perquisite and allow neither deduction. (correct answer)

Answer: D — Include ₹2,400 as a taxable perquisite and allow neither deduction.

Explanation. Professional tax paid by the employer on behalf of an employee is an obligation of the employee discharged by the employer and is included as a taxable perquisite. Thus, ₹2,400 is added to Arjun's salary. His own payment of ₹2,500 is not a deduction under the default regime. Section 202(2)(a)(iv) specifically disallows the deduction under section 19(1), Table SI No. 1 while computing income under section 202(1). Hence, neither amount reduces his taxable salary.

Where it goes wrong. Allowing the employee's own professional tax payment as a deduction merely because section 19 contains a deduction for employment tax.

Authority. Section 17(1) of the Income-tax Act, 2025; Section 19(1), Table SI No. 1 of the Income-tax Act, 2025; Section 202(2)(a)(iv) of the Income-tax Act, 2025

Question 3 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Arjun received entertainment allowance of ₹5,000 per month and spent the entire amount on client hospitality. Which treatment is correct while computing his salary under the default regime?

1. The entire ₹60,000 is taxable without a separate deduction. (correct answer)
2. Only ₹48,000 is taxable after a one-fifth allowance deduction.
3. The amount spent on client hospitality is exempt from salary.
4. A deduction of ₹5,000 is available against his salary.

Answer: A — The entire ₹60,000 is taxable without a separate deduction.

Explanation. Entertainment allowance is treated as a taxable allowance under the salary provisions. Arjun receives ₹5,000 × 12 = ₹60,000 during the tax year. The Income-tax Act, 2025 does not provide a separate deduction for entertainment allowance in section 19(1), even where the amount is spent on hospitality. The expenditure incurred by the employee therefore does not reduce the allowance's taxable amount. The entire ₹60,000 remains part of salary income.

Where it goes wrong. Importing the former one-fifth or ₹5,000 deduction applicable under the earlier statutory framework.

Authority. Section 16 of the Income-tax Act, 2025; Section 19(1) of the Income-tax Act, 2025

Question 4 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Determine Arjun's income chargeable under the head Salaries for tax year 2026-27 under the default regime, taking account of all the facts stated in the scenario.

1. ₹11,06,900
2. ₹11,11,900
3. ₹11,09,400 (correct answer)
4. ₹11,84,400

Answer: C — ₹11,09,400

Explanation. Basic salary is ₹10,20,000 and DA is 10% × ₹10,20,000 = ₹1,02,000. Entertainment allowance is ₹60,000. Employer-paid professional tax of ₹2,400 is a taxable perquisite. Gross salary is ₹11,84,400. Deduct standard deduction of ₹75,000 under section 19(1), Table SI No. 2. The employee's ₹2,500 professional tax payment is not deductible under the default regime. Salary income is ₹11,84,400 − ₹75,000 = ₹11,09,400.

Where it goes wrong. Deducting employee-paid professional tax, omitting employer-paid professional tax or allowing two standard deductions for the two salary periods.

Authority. Section 16 of the Income-tax Act, 2025; Section 17(1) of the Income-tax Act, 2025; Section 19(1), Table SI No. 2 of the Income-tax Act, 2025; Section 202(2)(a)(iv) of the Income-tax Act, 2025

Question 5 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Smt. Anuradha Sen is a State Government accounts officer who served throughout tax year 2026-27. She is orthopedically handicapped, with a disability affecting her lower extremities, and travels daily between her residence in Delhi and her Secretariat office. Her basic salary is ₹50,000 per month. Dearness allowance is paid at 10% of basic salary. The salary arrangement separately provides transport allowance of ₹18,000 per month to meet her commuting costs; under the same service terms, dearness allowance attributable to the eligible transport-allowance component is ₹1,500 per month. The allowance is not reimbursed against actual bills. An entertainment allowance of ₹6,000 per month is also paid in cash. Her payroll manager believes that Government service makes the entertainment allowance deductible by 20% of salary, while another colleague says that all transport allowance is taxable under the default regime. Anuradha remains in the default regime under section 202(1); she has no other salary components and did not pay professional tax personally. Assume Delhi is the place of duty for all 12 months and that her disability and commuting purpose satisfy the prescribed category. The employer has not separately paid any tax on her behalf. Her attendance records show 12 full months of service, and the stated figures are monthly amounts paid from April 2026 through March 2027 without mid-year revision. She seeks the taxable salary calculation after considering each allowance and the annual standard deduction.

Anuradha works in Delhi and receives transport allowance of ₹18,000 per month. DA attributable to the eligible transport-allowance component is ₹1,500 per month. What is the monthly exemption available under the default regime?

1. ₹16,500 per month (correct answer)
2. ₹15,000 per month
3. ₹18,000 per month
4. ₹13,500 per month

Answer: A — ₹16,500 per month

Explanation. Rule 280(2) prescribes transport-allowance relief for an employee who satisfies the specified disability and commuting conditions. For a metro city, the monthly limit is ₹15,000 plus DA thereon. Anuradha's eligible DA component is ₹1,500. Therefore, the monthly exemption is ₹15,000 + ₹1,500 = ₹16,500. The fact that the default regime applies does not eliminate this specifically prescribed transport-allowance relief.

Where it goes wrong. Treating the entire transport allowance as taxable under the default regime or ignoring the eligible DA component.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026; Section 202(2)(a)(ii) of the Income-tax Act, 2025

Question 6 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Anuradha receives transport allowance of ₹18,000 per month, including the stated DA component of ₹1,500. Assuming she satisfies the prescribed disability and commuting conditions for all 12 months, what amount of this allowance remains taxable?

1. Nil
2. ₹18,000 (correct answer)
3. ₹36,000
4. ₹21,600

Answer: B — ₹18,000

Explanation. The monthly transport allowance, inclusive of its DA component, is ₹18,000. The prescribed metro-city exemption is ₹15,000 + ₹1,500 = ₹16,500 per month. The taxable balance is ₹18,000 − ₹16,500 = ₹1,500 per month. For 12 months, taxable transport allowance is ₹1,500 × 12 = ₹18,000. The computation applies the prescribed limit rather than treating the whole allowance as exempt merely because Anuradha satisfies the disability condition.

Where it goes wrong. Exempting the entire amount received instead of restricting the exemption to the prescribed monthly limit.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 7 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Anuradha is a State Government employee receiving entertainment allowance of ₹6,000 per month. What is the correct treatment of this allowance under the Income-tax Act, 2025?

1. Deduction is 20% of basic salary, subject to ₹5,000.
2. Deduction is the amount actually spent on hospitality.
3. The allowance is exempt because the employer is Government.
4. The entire ₹72,000 is taxable without a separate deduction. (correct answer)

Answer: D — The entire ₹72,000 is taxable without a separate deduction.

Explanation. Entertainment allowance received by Anuradha is ₹6,000 × 12 = ₹72,000. The allowance is taxable as salary. Section 19(1) of the Income-tax Act, 2025 does not provide a separate entertainment-allowance deduction, including for Central or State Government employees. Accordingly, the entire ₹72,000 is taxable. Government employment does not create a deduction under the current statutory framework merely because the earlier law contained a specific provision for such employees.

Where it goes wrong. Applying the earlier Government-employee entertainment-allowance deduction to the May 2027 statutory framework.

Authority. Section 16 of the Income-tax Act, 2025; Section 19(1) of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

Question 8 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Based on Anuradha's salary, DA, entertainment allowance and transport allowance, determine her income chargeable under Salaries under section 202(1), after the applicable exemption and standard deduction.

1. ₹6,57,000
2. ₹6,73,000
3. ₹6,75,000 (correct answer)
4. ₹7,50,000

Answer: C — ₹6,75,000

Explanation. Basic salary is ₹50,000 × 12 = ₹6,00,000 and DA is ₹60,000. Entertainment allowance is ₹72,000. Transport allowance taxable portion is ₹18,000, as computed after allowing ₹16,500 × 12 = ₹1,98,000 exemption. Gross taxable salary is ₹6,00,000 + ₹60,000 + ₹72,000 + ₹18,000 = ₹7,50,000. Less standard deduction of ₹75,000 under section 19(1), Table SI No. 2. Taxable salary is ₹6,75,000.

Where it goes wrong. Either denying the disabled-employee transport exemption or granting an additional deduction for Government entertainment allowance.

Authority. Section 16 of the Income-tax Act, 2025; Section 19(1), Table SI No. 2 of the Income-tax Act, 2025; Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 9 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Kavya Rao is employed by Nandini Real Estates Pvt. Ltd. and has no income from business or profession. For tax year 2026-27, she exercises the option under section 202(4) to shift out of the default regime so that exemptions for HRA and specified personal allowances may be considered. From 1 April to 30 September 2026, she occupies rented accommodation in Bengaluru and receives basic salary of ₹1,00,000 per month, dearness allowance of ₹20,000 per month and HRA of ₹55,000 per month. Her employment terms state that 60% of DA forms part of salary for retirement benefits. She pays rent of ₹52,000 for each of these six months. On 1 October 2026, she is transferred to Jaipur, where she rents a different flat and pays ₹30,000 monthly through 31 March 2027. For the Jaipur period, basic salary is ₹1,10,000 per month, DA is ₹22,000 per month and HRA is ₹45,000 per month; the same 60% DA condition continues. Kavya also receives children education allowance of ₹5,000 per month for each of her three children throughout the year. Two children stay in hostels, for whom she receives hostel allowance of ₹12,000 per month per child. No other allowance or perquisite affects the HRA salary base. Rent receipts and payroll records cover all stated months, and each allowance is paid for each corresponding month. Compute HRA separately for each location and apply the children education and hostel allowance limits under the optional regime.

Calculate the aggregate HRA exemption available to Kavya for the Bengaluru and Jaipur periods, applying the separate city limits and the prescribed salary components.

1. ₹3,50,880 (correct answer)
2. ₹3,36,000
3. ₹3,62,880
4. ₹4,00,000

Answer: A — ₹3,50,880

Explanation. For Bengaluru, salary for six months is (₹1,00,000 + ₹12,000) × 6 = ₹6,72,000. The three HRA limits are ₹3,30,000, ₹2,44,800 and ₹3,36,000; exemption is ₹2,44,800. For Jaipur, salary is (₹1,10,000 + ₹13,200) × 6 = ₹7,39,200. The three limits are ₹2,70,000, ₹1,06,080 and ₹2,95,680; exemption is ₹1,06,080. Aggregate exemption is ₹3,50,880.

Where it goes wrong. Applying one city percentage to the full year instead of calculating the exemption for each separate occupation period.

Authority. Schedule III, Table SI No. 11 of the Income-tax Act, 2025; Income-tax Rules, 2026, Rule 279 (Perquisite Valuation)

Question 10 · 2 marks · Taxation - DT Ch 03: Salaries · hard

What is the total taxable portion of Kavya's HRA for the tax year, after deducting the exemption computed separately for Bengaluru and Jaipur?

1. ₹2,59,120
2. ₹2,49,120 (correct answer)
3. ₹2,70,000
4. ₹3,50,880

Answer: B — ₹2,49,120

Explanation. Kavya's total HRA received is ₹55,000 × 6 + ₹45,000 × 6 = ₹6,00,000. The aggregate exemption for the two periods is ₹3,50,880. Taxable HRA is therefore ₹6,00,000 − ₹3,50,880 = ₹2,49,120. The exemption must be restricted to the lower of the three prescribed amounts for each relevant location and period. The unused portion of one period's limit cannot be transferred to the other period.

Where it goes wrong. Subtracting the HRA exemption from only one period's HRA or applying the city-wise limits to annualised figures without period segregation.

Authority. Schedule III, Table SI No. 11 of the Income-tax Act, 2025; Income-tax Rules, 2026, Rule 279 (Perquisite Valuation)

Question 11 · 2 marks · Taxation - DT Ch 03: Salaries · medium

What is the aggregate exemption available to Kavya for children education allowance and hostel allowance for the year, considering the prescribed limit on the number of children?

1. ₹2,16,000
2. ₹1,80,000
3. ₹2,88,000 (correct answer)
4. ₹3,60,000

Answer: C — ₹2,88,000

Explanation. Children education allowance exemption is limited to ₹3,000 per month for each of two children: ₹3,000 × 2 × 12 = ₹72,000. Hostel allowance exemption is limited to ₹9,000 per month for each of two children: ₹9,000 × 2 × 12 = ₹2,16,000. These are separate allowance limits. Aggregate exemption is ₹72,000 + ₹2,16,000 = ₹2,88,000 under the optional regime. The prescribed maximum of two children applies separately to the respective allowances.

Where it goes wrong. Combining both allowances under one monthly ceiling or applying the limit to all three children.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 12 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Determine the total taxable amount of Kavya's HRA, children education allowance and hostel allowance for tax year 2026-27 under the optional regime.

1. ₹3,50,880
2. ₹3,80,000
3. ₹4,08,000
4. ₹4,29,120 (correct answer)

Answer: D — ₹4,29,120

Explanation. Taxable HRA is ₹2,49,120. Children education allowance received is ₹5,000 × 3 × 12 = ₹1,80,000; exemption is ₹72,000, leaving ₹1,08,000 taxable. Hostel allowance received is ₹12,000 × 2 × 12 = ₹2,88,000; exemption is ₹2,16,000, leaving ₹72,000 taxable. Aggregate taxable allowances are ₹2,49,120 + ₹1,08,000 + ₹72,000 = ₹4,29,120. The computation applies the optional-regime limits separately.

Where it goes wrong. Deducting the education and hostel exemptions from HRA, or overlooking the restriction to two eligible children.

Authority. Schedule III, Table SI No. 11 and 13 of the Income-tax Act, 2025; Rule 279 and Rule 280(2) of the Income-tax Rules, 2026

Question 13 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Dev joined an employer on 1 February 2027 and left on 31 March 2027. His total salary for these two months was ₹84,000. He has no other salary receipts and computes tax under section 202(1). What standard deduction is admissible? Consider whether the annual ceiling must be reduced proportionately for the period of employment.

Mr. Dev joined an employer on 1 February 2027 and left on 31 March 2027. His total salary for these two months was ₹84,000. He has no other salary receipts and computes tax under section 202(1). What standard deduction is admissible? Consider whether the annual ceiling must be reduced proportionately for the period of employment.

1. ₹75,000, since salary exceeds the statutory ceiling. (correct answer)
2. ₹50,000, because employment lasted only two months.
3. ₹84,000, since deduction equals the salary received.
4. Nil, because supporting expenditure was not furnished.

Answer: A — ₹75,000, since salary exceeds the statutory ceiling.

Explanation. Section 19(1), Table SI No. 2 provides a standard deduction equal to the lower of ₹75,000 and salary under the default regime. Dev's total salary is ₹84,000. The lower amount is ₹75,000. The provision does not require the standard deduction ceiling to be reduced in the ratio of months employed. Consequently, salary after this deduction is ₹84,000 − ₹75,000 = ₹9,000, before any other adjustment.

Where it goes wrong. Reducing the standard deduction in proportion to the two-month employment period.

Authority. Section 19(1), Table SI No. 2 of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

Question 14 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Ritu receives salary of ₹6,60,000 from Employer A and ₹3,40,000 from Employer B during the same tax year. Both employers have deducted tax at source independently. She has remained under the default tax regime. What is the standard deduction available while consolidating her salary income?

Ms. Ritu receives salary of ₹6,60,000 from Employer A and ₹3,40,000 from Employer B during the same tax year. Both employers have deducted tax at source independently. She has remained under the default tax regime. What is the standard deduction available while consolidating her salary income?

1. Two deductions of ₹75,000, one against each employer's salary.
2. One deduction of ₹50,000, because she has two employers.
3. One deduction of ₹75,000 against the aggregate salary. (correct answer)
4. No deduction, because each employer computed salary separately.

Answer: C — One deduction of ₹75,000 against the aggregate salary.

Explanation. Salary from Employer A is ₹6,60,000 and salary from Employer B is ₹3,40,000. Aggregate salary is ₹10,00,000. Section 19(1), Table SI No. 2 provides the deduction in computing the employee's income under the head Salaries; it is not a separate deduction for each employer. Since aggregate salary exceeds ₹75,000, the admissible standard deduction is ₹75,000 once. Salary after deduction is ₹9,25,000.

Where it goes wrong. Treating the standard deduction as an employer-wise benefit instead of applying it once in the employee's consolidated salary computation.

Authority. Section 19(1), Table SI No. 2 of the Income-tax Act, 2025; Section 202(1) of the Income-tax Act, 2025

Question 15 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Suresh exercises the option to shift out of the default regime. During tax year 2026-27, he pays ₹2,500 as professional tax for that year and ₹600 towards professional tax arrears relating to the preceding tax year. The aggregate amount paid in the current tax year consequently exceeds the annual constitutional ceiling. What deduction is available for the current tax year?

Mr. Suresh exercises the option to shift out of the default regime. During tax year 2026-27, he pays ₹2,500 as professional tax for that year and ₹600 towards professional tax arrears relating to the preceding tax year. The aggregate amount paid in the current tax year consequently exceeds the annual constitutional ceiling. What deduction is available for the current tax year?

1. ₹2,500, limited to the annual constitutional ceiling.
2. ₹3,100, including the ₹600 paid towards earlier arrears. (correct answer)
3. ₹600, relating only to the earlier tax-year liability.
4. Nil, because the payment partly relates to a prior year.

Answer: B — ₹3,100, including the ₹600 paid towards earlier arrears.

Explanation. Under section 19(1), Table SI No. 1, the entire amount of professional tax paid by the assessee is deductible when the optional regime applies. Suresh paid ₹2,500 for the current year and ₹600 towards earlier arrears during the current year. Total payment is ₹2,500 + ₹600 = ₹3,100. The annual constitutional ceiling governs professional tax payable for a person, but payments made in a tax year can exceed ₹2,500 where arrears are settled. The deduction is ₹3,100.

Where it goes wrong. Confusing the annual ceiling on professional tax payable with the amount actually paid during a tax year, including arrears.

Authority. Section 19(1), Table SI No. 1 of the Income-tax Act, 2025

Question 16 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. A company pays ₹2,400 of professional tax directly to the State authority on behalf of an employee who has exercised the option to shift out of the default regime. The employee's salary computation includes this amount as an obligation discharged by the employer. What is the correct net treatment of this amount?

A company pays ₹2,400 of professional tax directly to the State authority on behalf of an employee who has exercised the option to shift out of the default regime. The employee's salary computation includes this amount as an obligation discharged by the employer. What is the correct net treatment of this amount?

1. ₹2,400 is added to salary without any corresponding deduction.
2. The payment is ignored because the employee did not remit it.
3. A deduction of ₹2,400 is allowed without including a perquisite.
4. ₹2,400 is included and deducted, producing nil net addition. (correct answer)

Answer: D — ₹2,400 is included and deducted, producing nil net addition.

Explanation. Professional tax paid by the employer on behalf of an employee is first included in salary as a taxable perquisite because the employer discharges the employee's obligation. The amount included is ₹2,400. Since the employee has shifted out of the default regime, the professional-tax deduction under section 19(1), Table SI No. 1 is available. Deduction is ₹2,400. Therefore, the net salary effect of this item is ₹2,400 − ₹2,400 = Nil.

Where it goes wrong. Allowing the deduction but omitting the initial perquisite inclusion, or applying the default-regime restriction to an employee using the optional regime.

Authority. Section 17(1) of the Income-tax Act, 2025; Section 19(1), Table SI No. 1 of the Income-tax Act, 2025

Question 17 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. A Central Government employee receives entertainment allowance of ₹4,000 per month during tax year 2026-27. The employee spends ₹30,000 during the year on entertaining statutory visitors. What amount is chargeable as entertainment allowance under the Income-tax Act, 2025?

A Central Government employee receives entertainment allowance of ₹4,000 per month during tax year 2026-27. The employee spends ₹30,000 during the year on entertaining statutory visitors. What amount is chargeable as entertainment allowance under the Income-tax Act, 2025?

1. ₹43,000 after allowing a one-fifth deduction subject to the ceiling.
2. ₹48,000, with no specific entertainment-allowance deduction. (correct answer)
3. Nil, because the recipient is a Central Government employee.
4. ₹30,000, limited to the amount spent on entertainment.

Answer: B — ₹48,000, with no specific entertainment-allowance deduction.

Explanation. Entertainment allowance received is ₹4,000 × 12 = ₹48,000. The actual expenditure of ₹30,000 does not create an exemption. Section 19(1) of the Income-tax Act, 2025 does not provide a separate deduction for entertainment allowance, including for Government employees. Accordingly, the entire ₹48,000 is chargeable under Salaries. The amount spent on entertaining visitors does not alter the computation under the current statutory framework.

Where it goes wrong. Applying the earlier deduction of one-fifth of salary subject to ₹5,000, despite the change in the governing Act.

Authority. Section 16 of the Income-tax Act, 2025; Section 19(1) of the Income-tax Act, 2025

Question 18 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Priya rents accommodation in Bengaluru for the six months from October 2026 to March 2027. Her monthly basic salary is ₹1,00,000, HRA is ₹60,000 and rent paid is ₹80,000. There is no DA or turnover-based commission. She exercises the option to shift out of the default regime. What is the HRA exemption for these six months under Rule 279?

Ms. Priya rents accommodation in Bengaluru for the six months from October 2026 to March 2027. Her monthly basic salary is ₹1,00,000, HRA is ₹60,000 and rent paid is ₹80,000. There is no DA or turnover-based commission. She exercises the option to shift out of the default regime. What is the HRA exemption for these six months under Rule 279?

1. ₹2,40,000, applying 40% of salary for the period.
2. ₹3,39,000, being rent less 10% of salary.
3. ₹3,00,000, applying the 50% Bengaluru salary limit. (correct answer)
4. ₹3,60,000, being the HRA actually received.

Answer: C — ₹3,00,000, applying the 50% Bengaluru salary limit.

Explanation. Bengaluru is included in the cities for which the 50% salary limit applies under Rule 279. For six months, HRA received is ₹60,000 × 6 = ₹3,60,000. Rent less 10% of salary is ₹80,000 × 6 − 10% of ₹6,00,000 = ₹4,80,000 − ₹60,000 = ₹4,20,000. The third limit is 50% × ₹6,00,000 = ₹3,00,000. The least amount, ₹3,00,000, is exempt.

Where it goes wrong. Using the 40% limit for Bengaluru by applying the narrower metro-city list found in the earlier statutory framework.

Authority. Schedule III, Table SI No. 11 of the Income-tax Act, 2025; Income-tax Rules, 2026, Rule 279 (Perquisite Valuation)

Question 19 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. For HRA computation, Mr. Nikhil receives basic salary of ₹80,000 per month, DA of ₹25,000 of which 60% forms part of salary for retirement benefits, turnover commission of 2% on monthly turnover of ₹1,00,000, and a separate cash allowance of ₹4,000. A perquisite valued at ₹6,000 is also provided. What is the monthly salary figure to be used under Rule 279?

For HRA computation, Mr. Nikhil receives basic salary of ₹80,000 per month, DA of ₹25,000 of which 60% forms part of salary for retirement benefits, turnover commission of 2% on monthly turnover of ₹1,00,000, and a separate cash allowance of ₹4,000. A perquisite valued at ₹6,000 is also provided. What is the monthly salary figure to be used under Rule 279?

1. ₹97,000, including eligible DA and turnover commission. (correct answer)
2. ₹91,000, excluding turnover-based commission.
3. ₹1,05,000, including the separate cash allowance.
4. ₹1,15,000, including all DA and the perquisite.

Answer: A — ₹97,000, including eligible DA and turnover commission.

Explanation. For Rule 279, salary includes basic pay, DA forming part of salary for retirement benefits and commission expressed as a fixed percentage of turnover. Eligible DA is 60% × ₹25,000 = ₹15,000. Turnover commission is 2% × ₹1,00,000 = ₹2,000. Thus, HRA salary is ₹80,000 + ₹15,000 + ₹2,000 = ₹97,000 per month. The separate cash allowance and the perquisite are excluded from the HRA salary figure.

Where it goes wrong. Including all DA, other allowances or perquisites in the HRA salary base instead of applying the prescribed definition.

Authority. Schedule III, Table SI No. 11 of the Income-tax Act, 2025; Income-tax Rules, 2026, Rule 279 (Perquisite Valuation)

Question 20 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Karan receives HRA of ₹40,000 per month while occupying a house that he owns in Pune. He has not paid rent to any person during the year. His monthly salary for HRA purposes is ₹90,000. He proposes to claim the lower of actual HRA, rent less 10% of salary and 50% of salary. What exemption is available under Rule 279?

Mr. Karan receives HRA of ₹40,000 per month while occupying a house that he owns in Pune. He has not paid rent to any person during the year. His monthly salary for HRA purposes is ₹90,000. He proposes to claim the lower of actual HRA, rent less 10% of salary and 50% of salary. What exemption is available under Rule 279?

1. ₹3,60,000, based on HRA actually received.
2. ₹1,80,000, based on 40% of salary.
3. ₹2,40,000, based on rent less 10% of salary.
4. Nil, because he has not incurred rental expenditure. (correct answer)

Answer: D — Nil, because he has not incurred rental expenditure.

Explanation. HRA exemption under Schedule III, Table SI No. 11 and Rule 279 is intended for rent incurred for residential accommodation occupied by the employee. The accommodation must not be owned by the employee, and rental expenditure must actually be incurred. Karan occupies his own house and pays no rent. Consequently, no HRA exemption is available. The numerical limits of actual HRA, rent less 10% of salary and 50% of salary do not create an exemption when the basic eligibility condition is absent.

Where it goes wrong. Applying the three numerical limits without first checking whether the employee occupies rented accommodation and actually incurs rent.

Authority. Schedule III, Table SI No. 11 of the Income-tax Act, 2025; Income-tax Rules, 2026, Rule 279 (Perquisite Valuation)

Question 21 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Smt. Leena exercises the option to shift out of the default regime. She receives children education allowance of ₹4,500 per month for each of her three children throughout tax year 2026-27. All three children attend school. What is the total education-allowance exemption under Rule 280(2), and what is the taxable balance?

Smt. Leena exercises the option to shift out of the default regime. She receives children education allowance of ₹4,500 per month for each of her three children throughout tax year 2026-27. All three children attend school. What is the total education-allowance exemption under Rule 280(2), and what is the taxable balance?

1. Exemption ₹54,000; taxable balance ₹1,08,000.
2. Exemption ₹72,000; taxable balance ₹90,000. (correct answer)
3. Exemption ₹90,000; taxable balance ₹72,000.
4. Exemption ₹1,08,000; taxable balance ₹54,000.

Answer: B — Exemption ₹72,000; taxable balance ₹90,000.

Explanation. Actual education allowance received is ₹4,500 × 3 × 12 = ₹1,62,000. Rule 280(2) permits exemption of ₹3,000 per month per child, restricted to two children. Annual exemption is ₹3,000 × 2 × 12 = ₹72,000. Taxable allowance is ₹1,62,000 − ₹72,000 = ₹90,000. The third child's allowance remains taxable, and the excess over the monthly ceiling for the first two children is also taxable.

Where it goes wrong. Applying the ₹3,000 limit to all three children or treating the monthly exemption as the total annual exemption.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 22 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Mr. Raghav, who has opted out of the default regime, receives hostel allowance of ₹12,000 per month for each of his two children throughout the tax year. Both children stay in hostels for all 12 months. What are the annual exemption and taxable portions of the allowance?

Mr. Raghav, who has opted out of the default regime, receives hostel allowance of ₹12,000 per month for each of his two children throughout the tax year. Both children stay in hostels for all 12 months. What are the annual exemption and taxable portions of the allowance?

1. Exemption ₹1,80,000; taxable amount ₹1,08,000.
2. Exemption ₹2,40,000; taxable amount ₹48,000.
3. Exemption ₹2,16,000; taxable amount ₹72,000. (correct answer)
4. Exemption ₹2,88,000; taxable amount Nil.

Answer: C — Exemption ₹2,16,000; taxable amount ₹72,000.

Explanation. Hostel allowance received is ₹12,000 × 2 × 12 = ₹2,88,000. Under Rule 280(2), exemption is limited to ₹9,000 per month per child, subject to a maximum of two children. Annual exemption is ₹9,000 × 2 × 12 = ₹2,16,000. The taxable balance is ₹2,88,000 − ₹2,16,000 = ₹72,000. The allowance is eligible for this exemption only under the optional regime.

Where it goes wrong. Assuming that the whole hostel allowance is exempt because both children are staying in hostels.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 23 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. A salaried employee who has shifted out of the default regime receives children education allowance of ₹2,500 per month for each of two children and hostel allowance of ₹11,000 per month for each of the same two children. Both allowances are received for 12 months, and the children satisfy the relevant conditions. What is the aggregate exemption?

A salaried employee who has shifted out of the default regime receives children education allowance of ₹2,500 per month for each of two children and hostel allowance of ₹11,000 per month for each of the same two children. Both allowances are received for 12 months, and the children satisfy the relevant conditions. What is the aggregate exemption?

1. ₹2,76,000 (correct answer)
2. ₹2,16,000
3. ₹3,12,000
4. ₹2,40,000

Answer: A — ₹2,76,000

Explanation. Education allowance received is below its prescribed ceiling: ₹2,500 × 2 children × 12 months = ₹60,000, all of which is exempt. Hostel allowance exemption is restricted to ₹9,000 × 2 × 12 = ₹2,16,000, notwithstanding the higher amount received. Aggregate exemption is ₹60,000 + ₹2,16,000 = ₹2,76,000. The two allowances have independent monthly ceilings and must not be combined into a single limit.

Where it goes wrong. Using the education-allowance ceiling for hostel allowance or applying one common ceiling to both categories.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 24 · 2 marks · Taxation - DT Ch 03: Salaries · hard

Scenario. Ms. Shalini is a blind employee working in Bengaluru. She commutes between her residence and place of duty and satisfies the prescribed conditions. Her aggregate transport allowance, including DA attributable to that allowance, is ₹18,000 per month. DA included in this aggregate amount is ₹1,500 per month. How much of the allowance remains taxable for the full tax year?

Ms. Shalini is a blind employee working in Bengaluru. She commutes between her residence and place of duty and satisfies the prescribed conditions. Her aggregate transport allowance, including DA attributable to that allowance, is ₹18,000 per month. DA included in this aggregate amount is ₹1,500 per month. How much of the allowance remains taxable for the full tax year?

1. ₹36,000
2. Nil
3. ₹24,000
4. ₹18,000 (correct answer)

Answer: D — ₹18,000

Explanation. Bengaluru is included in the metro-city list for the prescribed transport-allowance limit. Monthly exemption is ₹15,000 plus DA thereon of ₹1,500, totalling ₹16,500. Shalini receives ₹18,000 per month, including the DA component. Taxable amount is ₹18,000 − ₹16,500 = ₹1,500 per month. For 12 months, taxable allowance is ₹1,500 × 12 = ₹18,000. The exemption is available under the default regime where the prescribed disability and commuting conditions are satisfied.

Where it goes wrong. Treating the metro-city ceiling as ₹15,000 without adding eligible DA, or exempting the entire amount received.

Authority. Schedule III, Table SI No. 13 of the Income-tax Act, 2025; Rule 280(2) of the Income-tax Rules, 2026

Question 25 · 2 marks · Taxation - DT Ch 03: Salaries · medium

Scenario. Mr. Sameer is an individual employee whose income consists only of salary. He wishes to claim HRA and children education allowance exemptions available under the optional regime for tax year 2026-27. He has no income from business or profession. His employer's payroll team asks him to confirm when the statutory option to shift out of the default regime must be exercised. Which statement correctly describes the prescribed timing?

Mr. Sameer is an individual employee whose income consists only of salary. He wishes to claim HRA and children education allowance exemptions available under the optional regime for tax year 2026-27. He has no income from business or profession. His employer's payroll team asks him to confirm when the statutory option to shift out of the default regime must be exercised. Which statement correctly describes the prescribed timing?

1. By written intimation to the employer on 1 April 2026.
2. Within 30 days after the first salary credit.
3. Along with the return for the tax year under section 263(1). (correct answer)
4. By a separate application within 60 days after year-end.

Answer: C — Along with the return for the tax year under section 263(1).

Explanation. For an individual who does not have income from business or profession, section 202(4)(b) provides that the option to shift out of the default regime is exercised along with the return of income to be furnished under section 263(1) for the relevant tax year. An earlier declaration to the employer for payroll withholding is not, by itself, the statutory exercise of this option. Sameer should exercise the option in the prescribed manner along with the relevant return.

Where it goes wrong. Confusing the employer's payroll declaration for tax withholding with the statutory exercise of the regime option under section 202(4).

Authority. Section 202(4)(b) of the Income-tax Act, 2025; Section 263(1) of the Income-tax Act, 2025