Taxation - DT Ch 03: Salaries - Test 5: answer key

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

Scenario. Smt. Anuradha Sen retired from Nandini Real Estates Pvt Ltd on 31 October 2026 after completing 27 years of service. On retirement, she became entitled to a monthly pension of Rs 48,000. The company began paying her pension from November 2026. She received Rs 48,000 per month for November and December 2026. With effect from 1 January 2027, she commuted 40% of her pension and received a lump sum of Rs 4,80,000 from the company. Thereafter, the company paid her the balance 60% of her monthly pension for January, February and March 2027. The commutation was carried out under the pension terms applicable to her employment. At retirement, Anuradha also received gratuity of Rs 16,00,000. She was a private-sector employee and was not employed by the Central Government, a local authority or a statutory corporation. Her gratuity was paid on the date of retirement and is not disputed. She has no other pension receipts during Tax Year 2026-27. Anuradha has opted to remain under the default tax regime under section 202(1) of the Income-tax Act, 2025. She believes that the entire lump sum is taxable because it was received after retirement, while her former employer believes that the gratuity receipt affects the deduction available for the commuted pension. For the purpose of the following questions, assume that the monthly pension amounts stated above are the amounts due and paid for the relevant months, and that no other deduction or exemption is to be considered. The questions require identification of the full commuted value represented by the lump sum, computation of the deduction available to a private-sector employee who receives gratuity, and separation of the taxable uncommuted pension from the commuted component. The treatment of commuted pension under section 19(1) is available irrespective of the tax regime selected.

Anuradha received Rs 4,80,000 on commuting 40% of her pension with effect from 1 January 2027. For applying the commuted-pension deduction formula applicable to a private-sector employee, the first step is to determine the lump sum that would represent all of the pension commuted on the same basis. What is the full commuted value represented by the payment received by her?

1. Rs 12,00,000 (correct answer)
2. Rs 9,60,000
3. Rs 8,00,000
4. Rs 7,20,000

Answer: A — Rs 12,00,000

Explanation. The amount received represents 40% of the pension commuted. The full commuted value is therefore calculated by grossing up the amount received: Rs 4,80,000 ÷ 40 × 100 = Rs 12,00,000. This full value is the base for determining the deduction available to an employee outside the specified Government and statutory categories. The receipt of gratuity then determines whether one-third or one-half of this full value is deductible. The calculation of the full commuted value is distinct from the amount actually received.

Where it goes wrong. Using Rs 4,80,000 itself as the full commuted value instead of grossing it up for the 40% commutation.

Authority. Section 19(1), Table SI No. 8 of the Income-tax Act, 2025

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

Anuradha is a private-sector employee and received gratuity of Rs 16,00,000 on retirement. Her commuted pension receipt represents 40% of the full commuted value, as computed from the facts in the case. Determine the deduction available in respect of the commuted pension under section 19(1), Table SI No. 8. Ignore the uncommuted pension while computing this deduction; the question concerns only the deductible part of the commuted component.

1. Rs 2,40,000
2. Rs 4,00,000 (correct answer)
3. Rs 6,00,000
4. Rs 8,00,000

Answer: B — Rs 4,00,000

Explanation. For an employee other than the specified Government and statutory categories who receives gratuity, the deduction is one-third of the full commuted value. From Q1, the full commuted value is Rs 12,00,000. Deduction = 1/3 × Rs 12,00,000 = Rs 4,00,000. The fact that Anuradha received gratuity is decisive: the one-half formula applies to an eligible private-sector employee who does not receive gratuity. Her chosen default regime does not withdraw this deduction.

Where it goes wrong. Applying the one-half formula merely because the employee commuted only part of the pension, without considering that gratuity was received.

Authority. Section 19(1), Table SI No. 8 of the Income-tax Act, 2025

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

Anuradha received monthly pension of Rs 48,000 for November and December 2026. From January 2027, she commuted 40% of her pension and consequently received the balance 60% at Rs 28,800 per month for January to March 2027. Compute the uncommuted pension chargeable for Tax Year 2026-27. Assume that all five monthly payments were due and received during the year and that there is no separate exemption applicable to her monthly pension.

1. Rs 1,44,000
2. Rs 2,40,000
3. Rs 1,82,400 (correct answer)
4. Rs 2,88,000

Answer: C — Rs 1,82,400

Explanation. Uncommuted pension is fully taxable, irrespective of whether the employee is from the Government or private sector. For November and December, the taxable amount is 2 × Rs 48,000 = Rs 96,000. After commutation, the balance pension is Rs 28,800 per month for January to March: 3 × Rs 28,800 = Rs 86,400. Total uncommuted pension = Rs 96,000 + Rs 86,400 = Rs 1,82,400. The reduction from January affects only the monthly pension payable after commutation.

Where it goes wrong. Taxing the original monthly pension for all five months, or treating the uncommuted balance as partly exempt because a portion was commuted.

Authority. Section 16(b) of the Income-tax Act, 2025; Section 19(1), Table SI No. 9 of the Income-tax Act, 2025

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

Anuradha's pension receipts during Tax Year 2026-27 consist of the commuted pension of Rs 4,80,000 and the uncommuted pension computed from her monthly payments. The deduction under section 19(1), Table SI No. 8, is available because she received gratuity. Determine the amount chargeable under the head 'Salaries' in respect of pension after allowing the commuted-pension deduction. No other salary receipt or deduction is to be considered.

1. Rs 1,82,400
2. Rs 2,40,000
3. Rs 3,20,000
4. Rs 2,62,400 (correct answer)

Answer: D — Rs 2,62,400

Explanation. Gross pension consists of commuted pension Rs 4,80,000 plus uncommuted pension Rs 1,82,400, giving Rs 6,62,400. The deduction for a private-sector employee receiving gratuity is one-third of the full commuted value: 1/3 × Rs 12,00,000 = Rs 4,00,000. Amount chargeable = Rs 6,62,400 − Rs 4,00,000 = Rs 2,62,400. The monthly uncommuted pension remains fully taxable; the deduction is confined to the commuted portion.

Where it goes wrong. Deducting one-third of the lump sum actually received rather than one-third of the full commuted value.

Authority. Section 16(b) of the Income-tax Act, 2025; Section 19(1), Table SI Nos. 8 and 9 of the Income-tax Act, 2025

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

Scenario. Vikramaditya Tech Labs LLP maintains a recognised provident fund for its employees. Karan Mehta, a senior employee, earns basic salary of Rs 1,40,000 per month and dearness allowance of Rs 30,000 per month. The terms of his employment provide for the dearness allowance as part of his salary. During Tax Year 2026-27, the employer contributes Rs 3,00,000 to Karan's recognised provident fund. Karan's average balance in that fund during the year is Rs 18,00,000, and interest is credited at 10.5% per annum. He is not covered by any additional employer-funded pension or superannuation arrangement. The LLP also employs Meera Rao as its chief financial officer. During the same tax year, the employer contributes Rs 3,40,000 to her recognised provident fund, Rs 3,00,000 to her account under the pension scheme referred to in section 124, and Rs 1,80,000 to an approved superannuation fund. The aggregate opening balance in these three funds is Rs 22,00,000 and the aggregate closing balance is Rs 26,00,000. The aggregate interest, dividend and similar income accrued in these funds during the year is Rs 2,40,000. No employer contribution in excess of the aggregate statutory ceiling, and no related taxable accretion, arose for Meera in any earlier tax year commencing on or after 1 April 2020. The payroll team has retained a calculation template that still flags employer contributions to an RPF above 12% of salary. It has also separately identified the aggregate employer contribution limit of Rs 7,50,000 and the rate threshold for interest credited to an RPF. The finance head wants the tax computation to reflect the law applicable for Tax Year 2026-27, including the amendments made by the Finance Act, 2026. For the Rule 16 computation relating to Meera, use the opening and closing fund balances and annual accretion stated above. Assume no withdrawals from these funds during the year.

Karan's employer contributes Rs 3,00,000 to his RPF during Tax Year 2026-27. His basic salary and dearness allowance together amount to Rs 20,40,000 for the year, and the payroll template flags the contribution exceeding 12% of that amount. What is the separate taxable amount arising solely from the former 12% RPF contribution test for Tax Year 2026-27, having regard to the Finance Act, 2026 amendment?

1. Nil, since the 12% limb has been omitted (correct answer)
2. Rs 55,200, being the amount above 12%
3. Rs 36,000, being 12% of the excess
4. Rs 3,00,000, being the whole contribution

Answer: A — Nil, since the 12% limb has been omitted

Explanation. The former 12% computation would have produced an excess of Rs 3,00,000 − (12% × Rs 20,40,000) = Rs 55,200. However, the Finance Act, 2026 omitted the 12% contribution limb from paragraph 6 of Part A of Schedule XI with effect from 1 April 2026. Accordingly, the Rs 55,200 is not separately taxable under that former test for Tax Year 2026-27. The aggregate employer-contribution ceiling under section 17(1)(h) must still be examined separately.

Where it goes wrong. Applying the pre-amendment 12% RPF contribution rule to Tax Year 2026-27 without giving effect to its omission.

Authority. Section 127 of the Finance Act, 2026; Schedule XI, Part A, paragraph 6 of the Income-tax Act, 2025, as amended

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

Karan's average RPF balance during the tax year is Rs 18,00,000. Interest is credited at 10.5% per annum. The notified benchmark rate relevant to the RPF interest rule is 9.5% per annum. Assume that the average balance remains constant for the year and that the interest amount can be computed by applying the two rates to that balance. Determine the portion of interest taxable as salary under the RPF interest rule.

1. Rs 1,89,000
2. Rs 18,000 (correct answer)
3. Rs 1,71,000
4. Rs 9,000

Answer: B — Rs 18,000

Explanation. Interest at 10.5% on Rs 18,00,000 is Rs 1,89,000. Interest at the permitted rate of 9.5% is Rs 1,71,000. The excess attributable to the additional 1% is Rs 1,89,000 − Rs 1,71,000 = Rs 18,000. The RPF rule brings the interest credited at a rate exceeding the notified rate into taxable income. The 12% employer-contribution limb was separately omitted by the Finance Act, 2026; that amendment does not remove the interest-rate limb.

Where it goes wrong. Treating all interest credited at 10.5% as taxable instead of isolating the portion attributable to the 1% excess rate.

Authority. Section 16(i) of the Income-tax Act, 2025; Schedule XI, Part A, paragraph 6(b) of the Income-tax Act, 2025

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

For Meera, the employer contributes Rs 3,40,000 to an RPF, Rs 3,00,000 to the pension scheme referred to in section 124 and Rs 1,80,000 to an approved superannuation fund during Tax Year 2026-27. The three contributions are made for the same employee. Determine the amount chargeable as a perquisite under the aggregate employer-contribution provision, before considering annual accretion.

1. Rs 1,80,000
2. Rs 3,40,000
3. Rs 70,000 (correct answer)
4. Nil

Answer: C — Rs 70,000

Explanation. Section 17(1)(h) aggregates employer contributions to the RPF, the pension scheme referred to in section 124 and an approved superannuation fund. Total contribution = Rs 3,40,000 + Rs 3,00,000 + Rs 1,80,000 = Rs 8,20,000. The aggregate ceiling is Rs 7,50,000 for the tax year. Taxable perquisite = Rs 8,20,000 − Rs 7,50,000 = Rs 70,000. The ceiling is applied once to the combined contributions, not separately to each fund.

Where it goes wrong. Applying a separate Rs 7,50,000 ceiling to each fund instead of aggregating all three employer contributions.

Authority. Section 17(1)(h) of the Income-tax Act, 2025

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

Meera's aggregate employer contribution in excess of the Rs 7,50,000 ceiling is the current-year amount PC. For the Rule 16 calculation, aggregate income accrued in the three funds during the year is Rs 2,40,000, while the average of their aggregate opening and closing balances is Rs 24,00,000. No earlier-year excess employer contribution or taxable accretion exists, so PC1 and TP1 are both nil. Compute the current-year taxable accretion under section 17(1)(i).

1. Rs 7,000
2. Rs 2,400
3. Rs 70,000
4. Rs 3,500 (correct answer)

Answer: D — Rs 3,500

Explanation. PC is Rs 70,000, being Rs 8,20,000 less Rs 7,50,000. The rate R = I/F(avg) = Rs 2,40,000/Rs 24,00,000 = 0.10. Since PC1 and TP1 are nil, Rule 16 gives TP = (PC/2) × R + (PC1 + TP1) × R = (Rs 70,000/2) × 0.10 + 0 = Rs 3,500. This is additional taxable accretion relating to employer contributions already included under section 17(1)(h).

Where it goes wrong. Applying the 10% rate to the full Rs 70,000 excess contribution instead of applying it to half of current-year PC where prior-year amounts are nil.

Authority. Section 17(1)(i) of the Income-tax Act, 2025; Rule 16 of the Income-tax Rules, 2026

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

Scenario. Aryan Steels Ltd has introduced a voluntary retirement scheme for employees seeking an early exit. The scheme is framed in accordance with the prescribed guidelines and includes economic viability criteria. Ajay Suri, aged 41, opts for voluntary retirement with effect from 31 December 2026. He has completed 5 years and 8 months of service. The company's normal age of superannuation is 60 years, leaving 19 years of service at the date of his retirement. The company agrees to pay him voluntary retirement compensation of Rs 5,50,000 in one payment. At the date of retirement, Ajay's monthly basic salary is Rs 24,000. He receives dearness allowance of Rs 6,000 per month, and the terms of employment provide that this allowance forms part of his retirement benefits. He also receives commission of Rs 2,000 per month, calculated as a fixed percentage of turnover. In addition, he receives a special allowance of Rs 5,000 per month and a performance bonus of Rs 8,000 per month. The special allowance and bonus are not calculated as a fixed percentage of turnover and are not part of the retirement-benefit salary definition applicable to this deduction. Ajay has not claimed a deduction for voluntary retirement compensation in an earlier tax year and has not been granted relief under section 157 in respect of this compensation. A colleague, Nisha, is also considering the scheme. On the proposed retirement date, Nisha will be 39 years and 11 months old and will have completed 9 years and 10 months of service. Both employees work for the same private-sector employer. Assume that the scheme otherwise satisfies the prescribed conditions, that the compensation figures are the amounts received or receivable under the scheme, and that no other exemption or deduction applies. The questions examine the eligible salary components, the completed years of service, the statutory monetary ceiling and the separate age-or-service eligibility condition.

Ajay's salary for the voluntary retirement deduction must be determined by including basic salary, dearness allowance forming part of retirement benefits and commission expressed as a fixed percentage of turnover. His special allowance and performance bonus do not satisfy that definition. What monthly salary figure should be used for the Rule 20 computation?

1. Rs 32,000 (correct answer)
2. Rs 37,000
3. Rs 40,000
4. Rs 45,000

Answer: A — Rs 32,000

Explanation. For this deduction, salary includes basic salary of Rs 24,000, qualifying dearness allowance of Rs 6,000 and fixed turnover-based commission of Rs 2,000. Thus, salary S = Rs 24,000 + Rs 6,000 + Rs 2,000 = Rs 32,000 per month. The special allowance of Rs 5,000 and performance bonus of Rs 8,000 are excluded because they are not qualifying salary components for this purpose. Rule 20 uses salary at the time of retirement.

Where it goes wrong. Including every recurring monthly payment in salary, even though the special allowance and performance bonus are excluded from this statutory salary definition.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Rule 20 of the Income-tax Rules, 2026

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

Ajay has completed 5 years and 8 months of service and has 228 months remaining before superannuation. His qualifying monthly salary is Rs 32,000 and the compensation received or receivable under the scheme is Rs 5,50,000. Determine the deduction under section 19(1), Table SI No. 12, by applying all four limits, including the statutory ceiling.

1. Rs 5,50,000
2. Rs 4,80,000 (correct answer)
3. Rs 5,00,000
4. Rs 72,96,000

Answer: B — Rs 4,80,000

Explanation. Completed years N = 5; the additional 8 months do not increase N. A = 3 × N × S = 3 × 5 × Rs 32,000 = Rs 4,80,000. B = M × S = 228 × Rs 32,000 = Rs 72,96,000. The four limits are compensation Rs 5,50,000, statutory ceiling Rs 5,00,000, A Rs 4,80,000 and B Rs 72,96,000. The least amount, and hence the deduction, is Rs 4,80,000.

Where it goes wrong. Rounding 5 years and 8 months up to 6 completed years, or overlooking the separate Rs 5,00,000 statutory ceiling.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Rule 20 of the Income-tax Rules, 2026

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

Ajay receives voluntary retirement compensation of Rs 5,50,000 and is entitled to a deduction of Rs 4,80,000 under section 19(1), Table SI No. 12. Assume the entire compensation is chargeable in the year of receipt and there are no other salary items or deductions. What is the balance of the compensation chargeable under the head 'Salaries' after the deduction?

1. Rs 5,50,000
2. Rs 4,80,000
3. Rs 70,000 (correct answer)
4. Nil

Answer: C — Rs 70,000

Explanation. Voluntary retirement compensation is included in salary-related income. The deduction computed in Q10 is Rs 4,80,000. Accordingly, the balance chargeable is Rs 5,50,000 − Rs 4,80,000 = Rs 70,000. The deduction is not the whole compensation merely because the employee satisfies the age condition. It is restricted to the least of the actual compensation, the statutory ceiling and the two Rule 20 salary-based limits.

Where it goes wrong. Treating the Rs 5,00,000 statutory ceiling as an automatic deduction instead of deducting the least of all prescribed limits.

Authority. Section 18 of the Income-tax Act, 2025; Section 19(1), Table SI No. 12 of the Income-tax Act, 2025

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

Nisha is an employee of the same private-sector employer and proposes to retire under the same scheme. On the proposed retirement date she will be 39 years and 11 months old and will have completed 9 years and 10 months of service. Assume the employer's scheme otherwise satisfies the prescribed conditions. Which conclusion follows from the employee eligibility condition under Rule 20?

1. She qualifies because her service exceeds 9 years
2. She qualifies because she is close to 40 years of age
3. She qualifies because the scheme is employer-approved
4. She does not qualify under either eligibility limb (correct answer)

Answer: D — She does not qualify under either eligibility limb

Explanation. Rule 20 requires an employee to have completed 10 years of service or completed 40 years of age. Nisha has completed only 9 years and 10 months, which is below 10 years. She is also 39 years and 11 months old, below the 40-year threshold. The conditions are alternative, but she satisfies neither. The fact that the employer's scheme otherwise complies with the guidelines does not dispense with the employee-level eligibility requirement.

Where it goes wrong. Treating either 9 years and 10 months as 10 completed years or 39 years and 11 months as 40 completed years.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Rule 20 of the Income-tax Rules, 2026

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

Scenario. A retired Central Government employee receives Rs 6,60,000 as commuted pension in Tax Year 2026-27. He also receives gratuity on retirement. The employee asks whether the receipt of gratuity restricts the deduction for commuted pension in the same manner as it does for a private-sector employee. Determine the amount deductible under section 19(1), Table SI No. 7, assuming the whole amount received is commuted pension and no other adjustment is required.

A retired Central Government employee receives Rs 6,60,000 as commuted pension in Tax Year 2026-27. He also receives gratuity on retirement. The employee asks whether the receipt of gratuity restricts the deduction for commuted pension in the same manner as it does for a private-sector employee. Determine the amount deductible under section 19(1), Table SI No. 7, assuming the whole amount received is commuted pension and no other adjustment is required.

1. Rs 6,60,000 (correct answer)
2. Rs 3,30,000
3. Rs 2,20,000
4. Nil

Answer: A — Rs 6,60,000

Explanation. The deduction for commuted pension received by an employee of the Central Government is the entire amount of commuted pension. Thus, deduction = Rs 6,60,000. The one-third and one-half restrictions apply to other employees under Table SI No. 8, depending on whether gratuity is received. Receipt of gratuity does not reduce the deduction for the specified Government category under Table SI No. 7. The deduction is also available irrespective of the selected tax regime.

Where it goes wrong. Applying the private-sector one-third formula to a Central Government employee.

Authority. Section 19(1), Table SI No. 7 of the Income-tax Act, 2025

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

Scenario. A private-sector employee retires without receiving gratuity and commutes 60% of his pension. The lump sum received for the commuted portion is Rs 3,60,000. The employee is not covered by any special Government or statutory category. Determine the deduction available for commuted pension under section 19(1), Table SI No. 8, by first deriving the full commuted value and then applying the relevant fraction.

A private-sector employee retires without receiving gratuity and commutes 60% of his pension. The lump sum received for the commuted portion is Rs 3,60,000. The employee is not covered by any special Government or statutory category. Determine the deduction available for commuted pension under section 19(1), Table SI No. 8, by first deriving the full commuted value and then applying the relevant fraction.

1. Rs 2,40,000
2. Rs 3,00,000 (correct answer)
3. Rs 1,80,000
4. Rs 3,60,000

Answer: B — Rs 3,00,000

Explanation. The lump sum of Rs 3,60,000 represents 60% of the full commuted value. Full value = Rs 3,60,000 ÷ 60 × 100 = Rs 6,00,000. Since the employee did not receive gratuity, the deduction is one-half of the full commuted value: 1/2 × Rs 6,00,000 = Rs 3,00,000. This is the prescribed formula for an eligible employee outside the specified Government categories who does not receive gratuity.

Where it goes wrong. Using one-third because the employee is from the private sector, without checking whether gratuity was received.

Authority. Section 19(1), Table SI No. 8 of the Income-tax Act, 2025

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

Scenario. A private-sector employee receives gratuity on retirement and commutes 75% of his pension. The lump sum received on commutation is Rs 4,50,000. He is not an employee of the Central Government, local authority or statutory corporation. Determine the deduction available under section 19(1), Table SI No. 8. The question requires the full commuted value to be calculated before applying the fraction relevant to an employee who receives gratuity.

A private-sector employee receives gratuity on retirement and commutes 75% of his pension. The lump sum received on commutation is Rs 4,50,000. He is not an employee of the Central Government, local authority or statutory corporation. Determine the deduction available under section 19(1), Table SI No. 8. The question requires the full commuted value to be calculated before applying the fraction relevant to an employee who receives gratuity.

1. Rs 4,50,000
2. Rs 3,00,000
3. Rs 2,00,000 (correct answer)
4. Rs 1,50,000

Answer: C — Rs 2,00,000

Explanation. The full commuted value is Rs 4,50,000 ÷ 75 × 100 = Rs 6,00,000. Since gratuity is received, the applicable deduction is one-third of that full value. Deduction = 1/3 × Rs 6,00,000 = Rs 2,00,000. The calculation is not one-third of the amount received; it is one-third of the full commuted value represented by the 75% portion. The employee's private-sector status brings the case within Table SI No. 8.

Where it goes wrong. Applying one-third directly to Rs 4,50,000 without grossing up for the 75% commutation.

Authority. Section 19(1), Table SI No. 8 of the Income-tax Act, 2025

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

Scenario. A private-sector employee who does not receive gratuity commutes 60% of his pension and receives Rs 2,70,000. He is not covered by any category entitled to the full deduction for commuted pension. Determine the deduction under section 19(1), Table SI No. 8. Assume that the commutation percentage and lump sum relate to the same pension entitlement and that no other pension relief is available.

A private-sector employee who does not receive gratuity commutes 60% of his pension and receives Rs 2,70,000. He is not covered by any category entitled to the full deduction for commuted pension. Determine the deduction under section 19(1), Table SI No. 8. Assume that the commutation percentage and lump sum relate to the same pension entitlement and that no other pension relief is available.

1. Rs 1,35,000
2. Rs 4,50,000
3. Rs 2,70,000
4. Rs 2,25,000 (correct answer)

Answer: D — Rs 2,25,000

Explanation. The full commuted value is Rs 2,70,000 ÷ 60 × 100 = Rs 4,50,000. An eligible private-sector employee who does not receive gratuity is entitled to a deduction of one-half of that full value. Deduction = 1/2 × Rs 4,50,000 = Rs 2,25,000. The answer is not one-half of the lump sum received, because the statutory calculation first reconstructs the full commuted value.

Where it goes wrong. Taking one-half of the amount actually received instead of one-half of the full commuted value.

Authority. Section 19(1), Table SI No. 8 of the Income-tax Act, 2025

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

Scenario. A former employee receives an uncommuted monthly pension of Rs 42,000 for eight months during Tax Year 2026-27. The employee was earlier employed by a State Government undertaking but is not receiving any commuted pension. He assumes that the exemption applicable to certain commuted pension receipts also covers his monthly pension. Compute the amount chargeable under the head 'Salaries' from this uncommuted pension, ignoring any other receipts.

A former employee receives an uncommuted monthly pension of Rs 42,000 for eight months during Tax Year 2026-27. The employee was earlier employed by a State Government undertaking but is not receiving any commuted pension. He assumes that the exemption applicable to certain commuted pension receipts also covers his monthly pension. Compute the amount chargeable under the head 'Salaries' from this uncommuted pension, ignoring any other receipts.

1. Rs 3,36,000 (correct answer)
2. Rs 2,24,000
3. Rs 1,68,000
4. Nil

Answer: A — Rs 3,36,000

Explanation. Uncommuted pension is taxable in full, whether the former employee worked in Government or private employment. The pension for eight months is 8 × Rs 42,000 = Rs 3,36,000. No deduction for commuted pension is relevant because no pension has been commuted. The deduction table distinguishes uncommuted pension from the commuted portion; the former remains fully taxable. The employee's former employer being a State Government undertaking does not alter this treatment.

Where it goes wrong. Extending the deduction for commuted pension to a monthly uncommuted pension.

Authority. Section 16(b) of the Income-tax Act, 2025; Section 19(1), Table SI No. 9 of the Income-tax Act, 2025

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

Scenario. An employee's average balance in a recognised provident fund during the tax year is Rs 16,00,000. Interest is credited at 10.25% per annum. The notified rate for the purpose of the recognised provident fund interest rule is 9.5% per annum. Assume a constant average balance and that the interest is credited for the entire year. What amount of interest is chargeable as salary by reason of the excess rate?

An employee's average balance in a recognised provident fund during the tax year is Rs 16,00,000. Interest is credited at 10.25% per annum. The notified rate for the purpose of the recognised provident fund interest rule is 9.5% per annum. Assume a constant average balance and that the interest is credited for the entire year. What amount of interest is chargeable as salary by reason of the excess rate?

1. Rs 1,64,000
2. Rs 12,000 (correct answer)
3. Rs 1,52,000
4. Rs 8,000

Answer: B — Rs 12,000

Explanation. The credited interest at 10.25% is Rs 16,00,000 × 10.25% = Rs 1,64,000. Interest at the notified rate of 9.5% is Rs 16,00,000 × 9.5% = Rs 1,52,000. The excess attributable to the additional 0.75% is Rs 1,64,000 − Rs 1,52,000 = Rs 12,000. Paragraph 6(b) of Part A of Schedule XI taxes the interest component credited at a rate exceeding the notified rate. It is the excess-rate component, not the whole interest credit, that is relevant here.

Where it goes wrong. Calculating taxable interest using the full 10.25% credit rather than the 0.75% rate differential.

Authority. Section 16(i) of the Income-tax Act, 2025; Schedule XI, Part A, paragraph 6(b) of the Income-tax Act, 2025

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

Scenario. For Tax Year 2026-27, an employer contributes Rs 3,20,000 to an employee's RPF. The employee's salary for the purpose of the former 12% test would have been Rs 18,00,000 for the year, and the employer makes no contribution to NPS or an approved superannuation fund. The payroll team proposes to tax the contribution above 12% of salary. What amount is separately taxable under that 12% test for the stated tax year?

For Tax Year 2026-27, an employer contributes Rs 3,20,000 to an employee's RPF. The employee's salary for the purpose of the former 12% test would have been Rs 18,00,000 for the year, and the employer makes no contribution to NPS or an approved superannuation fund. The payroll team proposes to tax the contribution above 12% of salary. What amount is separately taxable under that 12% test for the stated tax year?

1. Rs 1,04,000
2. Rs 3,20,000
3. Nil (correct answer)
4. Rs 1,16,000

Answer: C — Nil

Explanation. The former 12% threshold would have been Rs 18,00,000 × 12% = Rs 2,16,000, giving a historical excess of Rs 3,20,000 − Rs 2,16,000 = Rs 1,04,000. However, the Finance Act, 2026 omitted paragraph 6(a), which contained this 12% employer-contribution test, with effect from 1 April 2026. Therefore, no amount is taxable separately under that test for Tax Year 2026-27. The aggregate Rs 7,50,000 limit under section 17(1)(h) remains a separate provision.

Where it goes wrong. Applying a superseded RPF threshold to the tax year beginning on 1 April 2026.

Authority. Section 127 of the Finance Act, 2026; Schedule XI, Part A, paragraph 6 of the Income-tax Act, 2025, as amended

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

Scenario. During Tax Year 2026-27, an employer contributes Rs 3,80,000 to an employee's RPF, Rs 2,65,000 to the employee's NPS account under section 124 and Rs 2,10,000 to an approved superannuation fund. The employee has no other employer contributions to these funds during the year. Determine the taxable perquisite under section 17(1)(h), without including the annual accretion that may separately arise under section 17(1)(i).

During Tax Year 2026-27, an employer contributes Rs 3,80,000 to an employee's RPF, Rs 2,65,000 to the employee's NPS account under section 124 and Rs 2,10,000 to an approved superannuation fund. The employee has no other employer contributions to these funds during the year. Determine the taxable perquisite under section 17(1)(h), without including the annual accretion that may separately arise under section 17(1)(i).

1. Rs 2,10,000
2. Rs 1,15,000
3. Rs 3,80,000
4. Rs 1,05,000 (correct answer)

Answer: D — Rs 1,05,000

Explanation. The employer contributions must be aggregated: Rs 3,80,000 + Rs 2,65,000 + Rs 2,10,000 = Rs 8,55,000. The aggregate ceiling is Rs 7,50,000. Taxable perquisite = Rs 8,55,000 − Rs 7,50,000 = Rs 1,05,000. The calculation is made across the RPF, NPS and approved superannuation fund together. Section 17(1)(i) may separately tax related annual accretion, but that amount is outside the present question.

Where it goes wrong. Subtracting the ceiling from only the RPF contribution or applying the threshold independently to each fund.

Authority. Section 17(1)(h) of the Income-tax Act, 2025

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

Scenario. For a current tax year, an employee has an excess employer contribution PC of Rs 1,50,000. The corresponding prior-year figures are PC1 of Rs 80,000 and TP1 of Rs 7,500. Aggregate income accrued in the three specified funds during the current year is Rs 3,50,000; their aggregate opening and closing balances are Rs 30,00,000 and Rs 40,00,000. The prior-year amounts do not exceed the opening balance. Compute the current-year taxable accretion under Rule 16.

For a current tax year, an employee has an excess employer contribution PC of Rs 1,50,000. The corresponding prior-year figures are PC1 of Rs 80,000 and TP1 of Rs 7,500. Aggregate income accrued in the three specified funds during the current year is Rs 3,50,000; their aggregate opening and closing balances are Rs 30,00,000 and Rs 40,00,000. The prior-year amounts do not exceed the opening balance. Compute the current-year taxable accretion under Rule 16.

1. Rs 16,250 (correct answer)
2. Rs 15,000
3. Rs 23,750
4. Rs 8,750

Answer: A — Rs 16,250

Explanation. First calculate F(avg) = (Rs 30,00,000 + Rs 40,00,000)/2 = Rs 35,00,000. Therefore, R = I/F(avg) = Rs 3,50,000/Rs 35,00,000 = 10%. Rule 16 gives TP = (PC/2) × R + (PC1 + TP1) × R. Substitution gives (Rs 1,50,000/2 × 10%) + (Rs 80,000 + Rs 7,500) × 10% = Rs 7,500 + Rs 8,750 = Rs 16,250. The stated opening-balance condition does not require any reduction.

Where it goes wrong. Omitting the prior-year PC1 and TP1 component, or applying R to the full current-year PC instead of half of PC.

Authority. Section 17(1)(i) of the Income-tax Act, 2025; Rule 16 of the Income-tax Rules, 2026

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

Scenario. An employee of a private company, aged 41, opts for a voluntary retirement scheme after completing 4 years and 9 months of service. His qualifying monthly salary for Rule 20 is Rs 23,000, his compensation received or receivable is Rs 4,50,000, and 228 months remain before superannuation. The scheme satisfies the prescribed guidelines. Determine the deduction available after applying the completed-years formula, the remaining-months formula and the statutory ceiling.

An employee of a private company, aged 41, opts for a voluntary retirement scheme after completing 4 years and 9 months of service. His qualifying monthly salary for Rule 20 is Rs 23,000, his compensation received or receivable is Rs 4,50,000, and 228 months remain before superannuation. The scheme satisfies the prescribed guidelines. Determine the deduction available after applying the completed-years formula, the remaining-months formula and the statutory ceiling.

1. Rs 4,50,000
2. Rs 2,76,000 (correct answer)
3. Rs 5,00,000
4. Rs 8,28,000

Answer: B — Rs 2,76,000

Explanation. Completed years N = 4, so A = 3 × 4 × Rs 23,000 = Rs 2,76,000. The remaining-months limit B = 228 × Rs 23,000 = Rs 52,44,000. The other limits are actual compensation Rs 4,50,000 and the statutory ceiling Rs 5,00,000. The least of the four amounts is Rs 2,76,000. The employee meets the eligibility condition because he has completed 40 years of age, even though service is below 10 years.

Where it goes wrong. Rounding 4 years and 9 months up to 5 completed years, or wrongly denying eligibility despite the alternative age condition.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Rule 20 of the Income-tax Rules, 2026

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

Scenario. A private-sector employee is 39 years and 9 months old and has completed 9 years and 9 months of service on the date of voluntary retirement. The employer's scheme has been framed in accordance with the prescribed guidelines and the employee receives compensation on cessation of employment. He asks whether the scheme's compliance alone allows a deduction under section 19(1), Table SI No. 12. Identify the correct treatment under the employee eligibility condition.

A private-sector employee is 39 years and 9 months old and has completed 9 years and 9 months of service on the date of voluntary retirement. The employer's scheme has been framed in accordance with the prescribed guidelines and the employee receives compensation on cessation of employment. He asks whether the scheme's compliance alone allows a deduction under section 19(1), Table SI No. 12. Identify the correct treatment under the employee eligibility condition.

1. Deduction is available because compensation is paid on retirement
2. Deduction is available if the employer has completed 10 years
3. Deduction is not available because neither threshold is met (correct answer)
4. Deduction is available because the employee has completed 9 years

Answer: C — Deduction is not available because neither threshold is met

Explanation. Rule 20 requires the employee to have completed at least 10 years of service or completed 40 years of age. The employee has completed only 9 years and 9 months of service and is only 39 years and 9 months old. Neither alternative is satisfied. Compliance of the employer's scheme with the prescribed guidelines is a separate requirement; it cannot replace the employee-level eligibility condition. Accordingly, the deduction is not available on these facts.

Where it goes wrong. Assuming that an employer-compliant scheme makes every employee eligible, regardless of age or service.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Rule 20 of the Income-tax Rules, 2026

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

Scenario. An employee receives voluntary retirement compensation in Tax Year 2025-26 and is granted relief under section 157 in respect of that compensation. A further instalment of the same compensation becomes receivable in Tax Year 2026-27. The employee now proposes to claim the deduction under section 19(1), Table SI No. 12, against the later instalment. What is the consequence of the earlier relief under section 157?

An employee receives voluntary retirement compensation in Tax Year 2025-26 and is granted relief under section 157 in respect of that compensation. A further instalment of the same compensation becomes receivable in Tax Year 2026-27. The employee now proposes to claim the deduction under section 19(1), Table SI No. 12, against the later instalment. What is the consequence of the earlier relief under section 157?

1. Deduction is available only against the later instalment
2. Deduction is available after reducing the earlier relief
3. Deduction is available up to Rs 5,00,000 in each tax year
4. No deduction is available for that tax year or any other tax year (correct answer)

Answer: D — No deduction is available for that tax year or any other tax year

Explanation. The voluntary retirement deduction is not available where relief under section 157 has been allowed in respect of the relevant amount received or receivable on voluntary retirement, termination or voluntary separation. The restriction applies to that tax year and any other tax year. Therefore, the earlier relief prevents the employee from claiming the section 19(1), Table SI No. 12 deduction against the later instalment. The instalment method of payment does not override this restriction.

Where it goes wrong. Treating each instalment as a separate compensation event and claiming a fresh deduction despite relief having been allowed under section 157.

Authority. Section 157 of the Income-tax Act, 2025; Section 19(1), Table SI No. 12 of the Income-tax Act, 2025

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

Scenario. An employee opts to remain under the default tax regime under section 202(1) and receives voluntary retirement compensation after satisfying the prescribed conditions. The employer argues that the deduction under section 19(1), Table SI No. 12, is available only to an employee who shifts out of the default regime. Determine whether the employee can claim the deduction, assuming all other statutory conditions and limits are satisfied and no relief under section 157 has been granted.

An employee opts to remain under the default tax regime under section 202(1) and receives voluntary retirement compensation after satisfying the prescribed conditions. The employer argues that the deduction under section 19(1), Table SI No. 12, is available only to an employee who shifts out of the default regime. Determine whether the employee can claim the deduction, assuming all other statutory conditions and limits are satisfied and no relief under section 157 has been granted.

1. Yes, the deduction is available irrespective of the tax regime (correct answer)
2. No, the deduction requires an option under section 202(4)
3. Yes, but only up to Rs 2,50,000
4. No, the deduction is available only under the optional regime

Answer: A — Yes, the deduction is available irrespective of the tax regime

Explanation. The deduction for voluntary retirement compensation under section 19(1), Table SI No. 12, is available irrespective of whether the employee pays tax under the default regime or exercises the option to shift out under section 202(4). Since the employee satisfies the prescribed conditions and no relief under section 157 has been granted, the regime selected does not by itself deny the deduction. The amount remains restricted to the least of the four statutory and Rule 20 limits.

Where it goes wrong. Confusing deductions that are restricted under the default regime with the specific retirement-benefit deduction that remains available under either regime.

Authority. Section 19(1), Table SI No. 12 of the Income-tax Act, 2025; Section 202(1) and section 202(4) of the Income-tax Act, 2025