Taxation - DT Ch 09: Deductions - Test 1: answer key

Question 1 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. Vikramaditya Tech Labs Pvt. Ltd. maintains National Pension System accounts for eligible staff. During Tax Year 2026-27, Ms. Rhea Menon, a product director, remained employed throughout the year. Her annual remuneration comprises basic salary of ₹12,00,000, dearness allowance of ₹2,40,000 under terms of employment that treat it as part of salary for NPS purposes, house rent allowance of ₹3,60,000, performance bonus of ₹2,40,000 and taxable perquisites valued at ₹1,20,000. The company credited ₹2,25,000 to her Tier I NPS account during the year. Rhea separately deposited ₹1,80,000 from her bank account into the same account. She chose the default tax regime under section 202(1). The company confirms that its NPS payment is its own employer contribution and does not include any amount recovered from Rhea's salary. Mr. Karan Bedi, a State Government officer, also seeks guidance for the same tax year. His basic salary is ₹9,60,000 and dearness allowance is ₹1,20,000; his service rules expressly provide that the DA forms part of salary for this purpose. He received HRA of ₹2,40,000 and a non-cash perquisite valued at ₹48,000. The State Government contributed ₹1,55,000 to his notified pension account. Karan also pays tax under the default regime. Both employees have positive gross total income before Chapter VIII deductions, and neither has closed or withdrawn an NPS account. Ignore deductions other than those relating to employer contributions to a notified pension scheme. In applying the employer-contribution ceiling, the payroll total is not the salary base. Rhea asks whether her own payment can be added to the employer contribution merely because both sums reached the same Tier I account. Karan asks whether the State Government contribution has a lower ceiling than a private employer's contribution.

Using the statutory salary base for NPS purposes, what is the deduction allowable to Rhea for the employer's contribution of ₹2,25,000 for Tax Year 2026-27, assuming she remains under the default regime?

1. ₹2,25,000
2. ₹2,01,600 (correct answer)
3. ₹1,44,000
4. ₹1,80,000

Answer: B — ₹2,01,600

Explanation. Section 124(13)(b) defines salary for this purpose as basic salary plus DA where the employment terms so provide; HRA, bonus and perquisites are excluded. Salary = ₹12,00,000 + ₹2,40,000 = ₹14,40,000. Since Rhea's total income is chargeable under default section 202(1), section 124(2) substitutes 14% for the normal 10% ceiling for a non-government employer. 14% × ₹14,40,000 = ₹2,01,600. The deduction is the lower of the employer contribution of ₹2,25,000 and the ceiling of ₹2,01,600.

Where it goes wrong. Including HRA, bonus or perquisites in salary, or applying the 10% ceiling despite the default regime.

Authority. Sections 124(1), 124(2) and 124(13)(b), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961); section 202(1).

Question 2 · 2 marks · Taxation - DT Ch 09: Deductions · medium

For Karan, determine the maximum amount deductible in respect of the State Government's NPS contribution of ₹1,55,000. Apply the definition of salary and the ceiling applicable to a State Government employer under the default regime.

1. ₹1,08,000
2. ₹1,55,000
3. ₹1,20,000
4. ₹1,51,200 (correct answer)

Answer: D — ₹1,51,200

Explanation. For section 124, salary comprises basic salary and DA where the service terms include DA; HRA and perquisites are left out. Karan's salary base is ₹9,60,000 + ₹1,20,000 = ₹10,80,000. The limit for a Central or State Government employer is 14%: ₹10,80,000 × 14% = ₹1,51,200. Since the Government contributed ₹1,55,000, the allowable deduction is restricted to ₹1,51,200. The 14% Government ceiling applies irrespective of the regime.

Where it goes wrong. Using the gross payroll figure or treating the State Government as an employer subject to the private-employer ceiling.

Authority. Sections 124(1)(a) and 124(13)(b), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961).

Question 3 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Rhea asks for her total NPS deduction by adding her own deposit of ₹1,80,000 to the company's contribution. What is the total deduction she can claim under the default regime for the facts stated, considering only NPS contributions?

1. ₹2,01,600 (correct answer)
2. ₹3,81,600
3. ₹2,51,600
4. ₹1,44,000

Answer: A — ₹2,01,600

Explanation. Rhea's personal deposit of ₹1,80,000 is an assessee contribution governed by section 124(3), whereas the employer contribution is governed by section 124(1) and (2). The personal-contribution deduction up to ₹50,000 is not available while she is taxed under section 202(1). The employer deduction is limited to the lower of ₹2,25,000 and 14% of ₹14,40,000, namely ₹2,01,600. Hence total NPS deduction = ₹2,01,600 + nil = ₹2,01,600.

Where it goes wrong. Pooling employee and employer payments merely because both enter the same Tier I account.

Authority. Sections 124(1) to 124(3), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961); section 202(1).

Question 4 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Assume Rhea validly shifts out of the default regime for Tax Year 2026-27, while her salary components and the company's contribution remain unchanged. What would be the deduction for the employer's contribution alone under the ordinary regime ceiling applicable to a non-government employer?

1. ₹2,25,000
2. ₹2,01,600
3. ₹1,44,000 (correct answer)
4. ₹1,80,000

Answer: C — ₹1,44,000

Explanation. When Rhea is not taxed under section 202(1), the ordinary limit for an employer other than the Central or State Government is 10% of salary under section 124(1)(b). Her statutory salary remains ₹14,40,000 because HRA, bonus and perquisites are excluded. The limit is ₹14,40,000 × 10% = ₹1,44,000. The company's contribution is ₹2,25,000, so the deduction is the lower amount, ₹1,44,000. The 14% substitution is confined to the default regime.

Where it goes wrong. Carrying the default-regime 14% ceiling into a case where the assessee has shifted to the ordinary regime.

Authority. Section 124(1)(b) and 124(2), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961).

Question 5 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. Arjun Sen enrolled in the Agnipath Scheme on 15 January 2023 and subscribed to the Agniveer Corpus Fund on that date. He served as an Agniveer throughout Tax Year 2026-27. His monthly customized Agniveer Package was ₹30,000, and the scheme required him to contribute 30% of that package to his individual corpus account each month. The Central Government made a matching contribution of the same amount. Accordingly, during the twelve months of the tax year, Arjun's own contribution and the Central Government contribution were each ₹1,08,000. Interest of ₹8,400 was also credited to the corpus account during the year. The payroll statement included the Central Government contribution in Arjun's salary income. Arjun elected the default tax regime under section 202(1) and has not exercised the option to shift out of it. All contributions were credited to his individual Agniveer Corpus Fund account during the tax year, and he made no withdrawal or transfer from the account. Arjun's initial computation treated every credit in the corpus account as a qualifying deduction. He has therefore included his own contribution, the matching Government contribution and the interest credit in one total. He wants to know which items qualify while he remains in the default regime and whether the salary inclusion of the Government contribution is offset by a deduction. He is also considering whether the result would change if he validly exercised the option to shift out of the default regime for the tax year. Assume the contribution and account details are supported by the scheme records and that no other deduction is relevant.

Arjun's own contribution to the Agniveer Corpus Fund for the year is ₹1,08,000. He remains taxed under the default regime. What deduction is available in respect of this personal contribution for Tax Year 2026-27?

1. ₹54,000; half of the individual contribution qualifies
2. ₹50,000; the separate personal-contribution ceiling applies
3. ₹1,08,000; the whole personal contribution qualifies for deduction
4. Nil; personal payment is not deductible in the default regime (correct answer)

Answer: D — Nil; personal payment is not deductible in the default regime

Explanation. Arjun meets the enrolment and subscription date condition because he joined the Agnipath Scheme and subscribed to the Fund after 1 November 2022. However, section 125(1), which covers the individual's own amount paid or deposited, is available only where the individual shifts out of the default regime, as stated in the ICAI chapter. Arjun has not done so. Therefore, personal contribution of ₹1,08,000 × eligible fraction of nil = nil deduction under section 125(1).

Where it goes wrong. Assuming that eligibility to subscribe to the Fund makes the individual's contribution deductible under every tax regime.

Authority. Section 125(1), Income-tax Act, 2025 (corresponding to section 80CCH(1), Income-tax Act, 1961); section 202(1).

Question 6 · 2 marks · Taxation - DT Ch 09: Deductions · hard

The Central Government's matching contribution of ₹1,08,000 was included in Arjun's salary. While he remains in the default regime, what is the correct treatment of that contribution for computing total income?

1. Include ₹1,08,000 in salary and allow no deduction, giving a net addition of ₹1,08,000
2. Include ₹1,08,000 in salary and allow ₹1,08,000 deduction, giving nil net addition (correct answer)
3. Exclude ₹1,08,000 from salary and allow ₹1,08,000 deduction, giving a net reduction
4. Include ₹2,16,000 in salary and allow ₹1,08,000 deduction, giving a net addition of ₹1,08,000

Answer: B — Include ₹1,08,000 in salary and allow ₹1,08,000 deduction, giving nil net addition

Explanation. The Central Government contribution of ₹1,08,000 is included in Arjun's salary as stated in the facts. Section 125(2) then allows the whole amount contributed by the Central Government as a deduction, irrespective of the regime. Working: salary inclusion = ₹1,08,000; deduction under section 125(2) = ₹1,08,000; net effect on total income = ₹1,08,000 − ₹1,08,000 = nil. His personal contribution is a separate section 125(1) item and is not deductible in the default regime.

Where it goes wrong. Treating the Government contribution as exempt salary rather than including it first and claiming the corresponding deduction.

Authority. Section 125(2), Income-tax Act, 2025 (corresponding to section 80CCH(2), Income-tax Act, 1961); section 202(1).

Question 7 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Suppose Arjun validly exercises the option to shift out of the default regime for Tax Year 2026-27. Ignoring the interest credited to the Fund, what aggregate deduction can he claim for his own contribution and the Central Government's matching contribution?

1. ₹1,08,000 (only one contribution stream qualifies)
2. ₹1,62,000 (one and a half contribution streams)
3. ₹2,16,000 (both contribution streams qualify) (correct answer)
4. Nil (neither contribution stream qualifies)

Answer: C — ₹2,16,000 (both contribution streams qualify)

Explanation. On shifting out of the default regime, Arjun can claim the whole personal contribution under section 125(1): ₹1,08,000. The Central Government's matching contribution remains deductible in full under section 125(2): ₹1,08,000. Aggregate deduction = ₹1,08,000 + ₹1,08,000 = ₹2,16,000. The ₹8,400 interest credit is not included in this computation because it is neither Arjun's deposit nor a fresh Government contribution. The Government contribution is included in salary before its deduction.

Where it goes wrong. Claiming only one of the two contribution streams after leaving the default regime, or adding interest to the deduction base.

Authority. Sections 125(1) and 125(2), Income-tax Act, 2025 (corresponding to section 80CCH, Income-tax Act, 1961).

Question 8 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Arjun also received an interest credit of ₹8,400 in his Agniveer Corpus Fund account during the year. He asks whether this credit should be added to the qualifying contribution amount under section 125 when computing the deduction. Which treatment is correct?

1. Nil deduction; interest is neither an individual nor a Government contribution (correct answer)
2. ₹8,400 deduction; every credit to the account is a qualifying contribution
3. ₹1,08,000 deduction; only the subscriber's contribution qualifies under section 125
4. ₹2,24,400 deduction; both contributions and the interest credit qualify

Answer: A — Nil deduction; interest is neither an individual nor a Government contribution

Explanation. Section 125(1) covers an amount paid or deposited by the enrolled individual in his Agniveer Corpus Fund account during the tax year. Section 125(2) covers the amount contributed by the Central Government. The ₹8,400 is interest accrued in the account, not a fresh payment by Arjun or a contribution by the Central Government. Accordingly, the interest component qualifying for deduction is nil. Under the default regime, only the matching Government contribution remains deductible; the interest does not enlarge it.

Where it goes wrong. Treating interest credited to the Fund as if it were a contribution made during the tax year.

Authority. Sections 125(1) to 125(3), Income-tax Act, 2025 (corresponding to section 80CCH, Income-tax Act, 1961).

Question 9 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. Aryan Steels Ltd. manufactures steel components and has carried on the same business since 2018. It had 100 employees on 31 March 2026. The business was not formed by splitting up or reconstruction of an existing business and was not acquired through transfer or business reorganisation. Its turnover for Tax Year 2026-27 was ₹12.50 crore. Cash receipts were 2.5% of total receipts and cash payments were 3.2% of total payments. The company had positive profits and gains from business and is subject to the account-audit requirement in section 63. The company hired 10 regular employees on 1 April 2026 at monthly emoluments of ₹24,000 each. They participated in a recognised provident fund and worked throughout the tax year. In addition, the company paid a statutory employer provident fund contribution of ₹2,880 per employee per month. It hired three more employees on 1 April at ₹25,500 per month, two employees on 1 April at ₹23,000 per month who did not participate in a recognised provident fund, and four employees on 1 November 2026 at ₹22,000 per month who did participate in the fund. All emoluments were paid through NEFT. No employee resigned, so the workforce numbered 119 on 31 March 2027. The November hires worked 151 days in this tax year. The company furnished the accountant's report containing the particulars for section 146 on 29 September 2027. Its return due date under section 263(1) is 31 October 2027, and it furnished the return on that date claiming the deduction. No report under section 172 applies. The finance head asks which employees qualify for the 2026-27 cost base, how statutory employer provident fund contributions are treated, when the November hires could qualify, and what date governs the accountant's report.

Compute Aryan Steels Ltd.'s deduction under section 146 for Tax Year 2026-27 in respect of the eligible employees hired on 1 April 2026. Select the amount of deduction, not the underlying additional employee cost.

1. ₹28,80,000
2. ₹11,52,000
3. ₹2,88,000
4. ₹8,64,000 (correct answer)

Answer: D — ₹8,64,000

Explanation. The 10 employees hired on 1 April have monthly emoluments not exceeding ₹25,000, participate in a recognised provident fund, work at least 240 days, and increase the workforce. Their cost is 10 × ₹24,000 × 12 = ₹28,80,000. Section 146(1) allows 30% of additional employee cost: ₹28,80,000 × 30% = ₹8,64,000. The other hires are excluded for the reasons specified in the scenario. The report and return conditions are also met.

Where it goes wrong. Selecting the cost base of ₹28,80,000 rather than the 30% deduction, or including hires excluded by the employee definition.

Authority. Sections 146(1), 146(3) and 146(5), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961); section 63.

Question 10 · 2 marks · Taxation - DT Ch 09: Deductions · hard

The four employees hired on 1 November 2026 worked for 151 days in Aryan Steels Ltd.'s business during Tax Year 2026-27. Assuming they remain employed for at least 240 days in the immediately succeeding tax year and all other conditions continue, when will they be treated as additional employees?

1. In Tax Year 2026-27, because they crossed the 150-day threshold
2. Never, since the 240-day threshold was not met in their first year
3. In Tax Year 2027-28, if they complete 240 days in that succeeding year (correct answer)
4. In both years, because the service period is carried into the next tax year

Answer: C — In Tax Year 2027-28, if they complete 240 days in that succeeding year

Explanation. Aryan Steels is not in the apparel, footwear or leather-product category, so the 240-day condition applies. The November hires worked 151 days, which is below 240; hence they are not additional employees for 2026-27. Section 146(5)(b)(iv) provides that where such an employee is employed for the required 240 days in the immediately succeeding tax year, the employee is deemed to be an additional employee of that succeeding year. Their qualifying period therefore begins in 2027-28, not 2026-27.

Where it goes wrong. Applying the special 150-day rule to a steel manufacturer or treating the carry-forward rule as retrospective.

Authority. Section 146(5)(b)(iv), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 11 · 2 marks · Taxation - DT Ch 09: Deductions · medium

For the 10 eligible employees, Aryan Steels Ltd. pays statutory employer provident fund contributions of ₹2,880 per employee per month in addition to monthly emoluments of ₹24,000. What is the additional employee cost attributable to these employees for Tax Year 2026-27, before applying the 30% deduction rate?

1. ₹28,80,000 (correct answer)
2. ₹31,20,000
3. ₹3,45,600
4. ₹25,92,000

Answer: A — ₹28,80,000

Explanation. Section 146(5)(c)(i) excludes employer contributions to a pension or provident fund, or another fund for the employee's benefit, where mandated by law. Thus ₹2,880 per employee per month is not part of emoluments. Additional employee cost = 10 employees × ₹24,000 monthly emoluments × 12 months = ₹28,80,000. The statutory employer contribution is not added to this base. Applying 30% later would produce the deduction of ₹8,64,000.

Where it goes wrong. Adding the mandatory employer provident fund contribution to emoluments merely because it is an employment-related cost.

Authority. Section 146(5)(c)(i), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 12 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Aryan Steels Ltd.'s return due date under section 263(1) is 31 October 2027, and it furnished its section 146 accountant's report on 29 September 2027. What is the statutory specified date for this report, and was the company's filing timely?

1. 31 August 2027, two months before the return due date
2. 30 September 2027, one month before the return due date (correct answer)
3. 31 October 2027, on the return due date itself
4. 30 November 2027, one month after the tax return due date

Answer: B — 30 September 2027, one month before the return due date

Explanation. Section 146(3)(c) requires the accountant's report before the specified date referred to in section 63. Under section 63(5)(a), that date is one month prior to the return due date under section 263(1). The return due date given is 31 October 2027; one month earlier is 30 September 2027. Aryan Steels furnished the report on 29 September, before the specified date, so it met the condition. A report furnished on 1 October would be late.

Where it goes wrong. Confusing the accountant's report deadline with the return due date itself.

Authority. Sections 146(3)(c), 63(5)(a) and 263(1), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 13 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Devika is employed by a non-Government company and is taxed under the default regime for Tax Year 2026-27. Her annual basic salary is ₹8,40,000 and dearness allowance is ₹1,20,000; the employment terms expressly make the DA part of salary for NPS purposes. She also receives HRA of ₹2,40,000 and taxable perquisites of ₹60,000. Her employer contributes ₹1,50,000 to a notified NPS account. The company has not recovered any part of its contribution from Devika. Determine the deduction allowable for the employer contribution.

1. ₹1,50,000.00
2. ₹1,20,000.00
3. ₹1,34,400.00 (correct answer)
4. ₹96,000.00

Answer: C — ₹1,34,400.00

Explanation. Salary for section 124 is ₹8,40,000 basic plus ₹1,20,000 DA, since the employment terms include DA. HRA and perquisites are excluded. Salary base = ₹9,60,000. As Devika is taxed under section 202(1), the non-government employer ceiling is 14%: ₹9,60,000 × 14% = ₹1,34,400. The employer paid ₹1,50,000, so the allowable deduction is the lower figure, ₹1,34,400. No part of the personal-contribution deduction is involved in this computation.

Where it goes wrong. Computing the 14% ceiling on basic salary alone or on gross remuneration including HRA and perquisites.

Authority. Sections 124(1), 124(2) and 124(13)(b), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961); section 202(1).

Question 14 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Aarav is employed by a private company and validly chooses the ordinary tax regime for Tax Year 2026-27. The salary relevant for the NPS ceiling, after applying the statutory definition, is ₹10,00,000; the figure excludes allowances and perquisites not forming part of salary for this purpose. His employer contributes ₹1,35,000 to his notified pension account during the year. Aarav makes no personal NPS contribution for which a separate deduction is being considered. What deduction is allowable for the employer contribution?

1. ₹1,00,000.00 (correct answer)
2. ₹1,35,000.00
3. ₹1,40,000.00
4. ₹85,000.00

Answer: A — ₹1,00,000.00

Explanation. For an employer other than the Central or State Government, section 124(1)(b) sets the ordinary-regime ceiling at 10% of salary. The 14% substitution in section 124(2) applies only when total income is chargeable under the default regime in section 202(1). Aarav has chosen the ordinary regime. Ceiling = ₹10,00,000 × 10% = ₹1,00,000. The employer contribution is ₹1,35,000, so deduction = lower of ₹1,35,000 and ₹1,00,000 = ₹1,00,000.

Where it goes wrong. Using the higher default-regime percentage for an assessee who has shifted out of that regime.

Authority. Section 124(1)(b) and 124(2), Income-tax Act, 2025 (corresponding to section 80CCD(2), Income-tax Act, 1961).

Question 15 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Rohan enrolled in the Agnipath Scheme and subscribed to the Agniveer Corpus Fund after 1 November 2022. For Tax Year 2026-27, his own contribution is ₹96,000 and the Central Government contributes a matching ₹96,000 to his individual corpus account. Rohan is taxed under the default regime and has not exercised the option to shift out. The Government contribution is also included in his salary computation. What amount is deductible in respect of these two contribution streams, taken together, for the year?

1. ₹1,92,000; both the subscriber and Government amounts qualify
2. ₹96,000; only the matching Government amount qualifies (correct answer)
3. ₹48,000; one-half of the Government amount qualifies
4. Nil; neither the personal nor Government amount qualifies

Answer: B — ₹96,000; only the matching Government amount qualifies

Explanation. The two streams are treated separately. Rohan's own ₹96,000 contribution falls under section 125(1), which is unavailable under the default regime. The Central Government's matching ₹96,000 is deductible in full under section 125(2), irrespective of the regime. Calculation: personal contribution deduction = nil; Government contribution deduction = ₹96,000; total allowable deduction = nil + ₹96,000 = ₹96,000. The Government contribution is included in salary before the corresponding deduction.

Where it goes wrong. Disallowing the Government contribution along with the personal contribution, or allowing both streams together under the default regime.

Authority. Sections 125(1) and 125(2), Income-tax Act, 2025 (corresponding to section 80CCH, Income-tax Act, 1961); section 202(1).

Question 16 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Arvind carries on a continuing trading business and has turnover of ₹9.60 crore in Tax Year 2026-27. Cash receipts are 3% of total receipts, but cash payments are 5.2% of total payments. He has recruited qualifying employees and otherwise meets the employee-related conditions in section 146. For the purpose of the section 63 account-audit gateway required by section 146, which conclusion follows from the turnover and cash percentages before claiming this deduction?

1. No, because turnover is below ₹10 crore and cash receipts alone are below 5%
2. No, because the higher ₹10 crore turnover threshold applies even if one cash test fails
3. No, because the ₹10 crore limit applies when either cash measure exceeds 5%
4. Yes, because cash payments exceed 5%, so the higher ₹10 crore threshold is unavailable (correct answer)

Answer: D — Yes, because cash payments exceed 5%, so the higher ₹10 crore threshold is unavailable

Explanation. Section 63 ordinarily requires audit where business turnover exceeds ₹1 crore. The higher ₹10 crore threshold applies only when both aggregate cash receipts and aggregate cash payments do not exceed 5%. Arvind's cash receipts are 3%, but cash payments are 5.2%; one of the two conditions fails. The higher threshold is therefore unavailable. Turnover of ₹9.60 crore exceeds the ordinary ₹1 crore threshold, so section 63 applies and the audit gateway for section 146 is met.

Where it goes wrong. Applying the ₹10 crore threshold after checking cash receipts alone and ignoring the separate cash-payment test.

Authority. Section 63(1), Income-tax Act, 2025 (corresponding to section 44AB, Income-tax Act, 1961); section 146(1).

Question 17 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A business hires an employee for the whole of Tax Year 2026-27, and the recruitment increases the workforce compared with the preceding year-end. The employee's monthly emoluments are ₹25,000, the employee participates in a recognised provident fund, works for 300 days and is paid through NEFT. The employer meets the other conditions of section 146, including the reporting and return requirements. What is the deduction attributable to this employee for the year?

1. ₹90,000 (30% rate) (correct answer)
2. ₹75,000 (25% rate)
3. ₹3,00,000 (full cost)
4. Nil (no eligible cost)

Answer: A — ₹90,000 (30% rate)

Explanation. Section 146(5)(b)(i) excludes an employee whose monthly emoluments exceed ₹25,000. At ₹25,000, the employee does not exceed the ceiling and is not excluded on this ground. Additional employee cost = ₹25,000 × 12 = ₹3,00,000. Deduction under section 146(1) = 30% × ₹3,00,000 = ₹90,000. The stated provident fund, service-day, headcount and payment-mode conditions are satisfied. An employee receiving ₹25,001 per month would be excluded.

Where it goes wrong. Reading the statutory words 'exceed ₹25,000' as if they also exclude an employee paid exactly ₹25,000.

Authority. Sections 146(1) and 146(5)(b)(i), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 18 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Two employers each add one employee whose monthly emoluments are ₹23,000. Each employee participates in a recognised provident fund, increases the employer's workforce and is paid through NEFT. The first employer manufactures footwear and the employee works 170 days in Tax Year 2026-27. The second employer operates an IT services business and its employee also works 170 days. Which employee meets the minimum service-period test for section 146 in that tax year?

1. Both employees qualify, because the 150-day service period is available to each business
2. Neither employee qualifies, because the general 240-day period applies to each
3. Only the footwear employee qualifies, because its business uses the 150-day period (correct answer)
4. Only the IT services employee qualifies, because a 150-day period applies there

Answer: C — Only the footwear employee qualifies, because its business uses the 150-day period

Explanation. Section 146 prescribes a 150-day condition for employees of businesses manufacturing apparel, footwear or leather products. The footwear employee worked 170 days and clears that test. For an IT services business, the general 240-day condition applies; 170 days is insufficient. Thus only the footwear employee satisfies the service-period test for 2026-27. All other eligibility facts are stated as satisfied. The special 150-day threshold is confined to the specified manufacturing categories.

Where it goes wrong. Applying the 150-day exception to all businesses rather than only apparel, footwear and leather-product manufacturing.

Authority. Section 146(5)(b)(iii) and (iv), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 19 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

An existing business employed 80 persons on 31 March 2026. During Tax Year 2026-27, it hired 12 new employees who otherwise meet the monthly emoluments, recognised provident fund, service-period and payment-mode tests. However, 12 existing employees resigned before 31 March 2027, leaving the workforce at 80 persons on that date. No other employees joined or left during the year. What is the additional employee cost, if any, for the tax year after applying the statutory headcount comparison?

1. 30% of the new employees' emoluments, despite the unchanged year-end headcount
2. 50% of all newly hired employees' emoluments, without adjusting for departures during the year
3. Emoluments of the 12 recruits, reduced by the emoluments of the 12 employees who resigned
4. Nil, because the workforce did not increase from the preceding tax year's closing count (correct answer)

Answer: D — Nil, because the workforce did not increase from the preceding tax year's closing count

Explanation. For an existing business, section 146(5)(a) makes additional employee cost nil if there is no increase in the number of employees from the total employed on the last day of the preceding tax year. Opening count on 31 March 2026 = 80; closing count on 31 March 2027 = 80; net increase = nil. Consequently, additional employee cost = nil and deduction = 30% × nil = nil, even though 12 persons were recruited during the year.

Where it goes wrong. Counting gross recruitment without testing whether the existing business achieved an increase in its employee count.

Authority. Section 146(5)(a), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 20 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Orion Bioanalytics Pvt. Ltd. commenced a new business on 1 April 2026 and employed 12 persons during its first tax year. Each employee received monthly emoluments of ₹22,000, participated in a recognised provident fund, worked at least 240 days and was paid through NEFT. The company had positive business profits, was an assessee to whom section 63 applied, was not formed by splitting up or transfer, and met the accountant's report and return conditions. What are the additional employee cost and section 146 deduction for Tax Year 2026-27?

1. ₹31,68,000; entire additional employee cost
2. ₹9,50,400; 30% deduction on eligible cost (correct answer)
3. ₹3,16,800; 10% of the eligible employee cost
4. Nil; no preceding-year employees are available

Answer: B — ₹9,50,400; 30% deduction on eligible cost

Explanation. Section 146(5)(a)(ii) measures additional employee cost in the first year of a new business by the emoluments paid or payable to employees employed during that tax year; it does not apply the preceding-year headcount test for an existing business. Cost = 12 × ₹22,000 × 12 = ₹31,68,000. The stated employees meet the monthly emolument, recognised provident fund, service-period and payment-mode tests. Deduction = 30% × ₹31,68,000 = ₹9,50,400 under section 146(1).

Where it goes wrong. Importing the preceding-year headcount comparison for an existing business into the first year of a new business.

Authority. Sections 146(1), 146(3) and 146(5)(a)(ii), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961); section 63.

Question 21 · 2 marks · Taxation - DT Ch 09: Deductions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A company has four additional employees for the whole of Tax Year 2026-27. Each receives monthly emoluments of ₹20,000, participates in a recognised provident fund, works for 260 days and increases the headcount. All four are paid through UPI rather than cheque or cash. The company otherwise satisfies section 146, including the accountant's report and timely return conditions. What deduction can it claim, and does payment through UPI meet the prescribed electronic-mode condition?

1. ₹96,000; UPI is not an eligible mode
2. ₹1,92,000; UPI is not an eligible mode
3. ₹2,88,000; UPI is an eligible mode (correct answer)
4. Nil; only NEFT and RTGS are eligible modes

Answer: C — ₹2,88,000; UPI is an eligible mode

Explanation. Rule 48 includes UPI among the prescribed electronic modes for payment of emoluments. The mode condition is therefore met. Additional employee cost = 4 × ₹20,000 × 12 = ₹9,60,000. Deduction under section 146(1) = 30% × ₹9,60,000 = ₹2,88,000. The facts state that the employees meet the monthly emolument, provident fund, service-period and workforce-increase tests and that the accountant's report and return conditions are fulfilled.

Where it goes wrong. Assuming that only NEFT, RTGS or account-payee instruments qualify, while the prescribed modes also include UPI.

Authority. Sections 146(1) and 146(5)(a)(ii), Income-tax Act, 2025; Rule 48, Income-tax Rules, 2026.

Question 22 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A qualifying existing business hires five additional employees on 1 April 2026, and each remains employed for the entire tax year. Each employee receives monthly emoluments of ₹22,000 and a statutory employer provident fund contribution of ₹2,640 per month. All employees participate in a recognised provident fund, work at least 240 days and are paid electronically. The headcount increases, and the other conditions of section 146 are fulfilled. What is the section 146 deduction for Tax Year 2026-27?

1. ₹13,20,000
2. ₹4,75,200
3. ₹2,64,000
4. ₹3,96,000 (correct answer)

Answer: D — ₹3,96,000

Explanation. Mandatory employer provident fund contributions are excluded from emoluments under section 146(5)(c)(i). Therefore, monthly emoluments remain ₹22,000 per employee. Additional employee cost = 5 × ₹22,000 × 12 = ₹13,20,000. Deduction = 30% × ₹13,20,000 = ₹3,96,000. Adding the statutory employer contribution would incorrectly raise the base to ₹15,84,000 and produce an overstated deduction of ₹4,75,200. The 30% rate is applied only after excluding that mandated contribution.

Where it goes wrong. Adding statutory employer provident fund contributions to the employees' emoluments before applying the 30% rate.

Authority. Sections 146(1) and 146(5)(c)(i), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 23 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

An eligible employer provides employment to an additional employee during Tax Year 2026-27, and the employee satisfies the statutory tests for that year. Assume that the gross total income includes business profits, the business continues, the employee-related amount is qualifying additional employee cost and all procedural conditions remain satisfied in the relevant years. For which three consecutive tax years does section 146 provide the deduction period in respect of that employment?

1. 2027-28, 2028-29 and 2029-30; the first eligible year is deferred
2. 2026-27, 2027-28 and 2028-29; the hiring year is included (correct answer)
3. 2026-27 and 2027-28; the third year is not available to the employer
4. 2026-27 only; the first year alone is counted for this employment

Answer: B — 2026-27, 2027-28 and 2028-29; the hiring year is included

Explanation. Section 146(2) states that the deduction under section 146(1) is allowed for three consecutive tax years beginning with the tax year in which employment is provided. Employment is provided in Tax Year 2026-27. The three-year sequence is therefore: first year 2026-27, second year 2027-28 and third year 2028-29. The commencement year is included in the three-year count; it is not an additional year before the period starts.

Where it goes wrong. Starting the three-year period in the tax year after recruitment or counting four tax years in total.

Authority. Section 146(1) and 146(2), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 24 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

An existing business adds four employees on 1 April 2026, each receiving monthly emoluments of ₹23,000, participating in a recognised provident fund, working 300 days and paid through NEFT. The hires increase the workforce, and the business satisfies the section 63, accountant's report and return conditions. For two of the four employees, however, the Government pays the entire contribution under the Employees' Pension Scheme notified under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. What deduction is available under section 146 for Tax Year 2026-27?

1. ₹1,65,600; two employees qualify (correct answer)
2. ₹3,31,200; all four employees qualify
3. ₹1,38,000; two employees partly qualify
4. Nil; none of the new employees qualify

Answer: A — ₹1,65,600; two employees qualify

Explanation. An additional employee excludes an employee for whom the Government pays the entire contribution under the Employees' Pension Scheme. Hence only two of the four recruits qualify. Their additional employee cost is 2 × ₹23,000 × 12 = ₹5,52,000. Section 146(1) allows 30% of that cost: ₹5,52,000 × 30% = ₹1,65,600. The other eligibility facts are satisfied for both qualifying employees; Government funding for the other two does not disqualify the entire workforce.

Where it goes wrong. Including employees whose entire Employees' Pension Scheme contribution is paid by the Government, or excluding all new hires merely because this applies to two of them.

Authority. Sections 146(1) and 146(5)(b)(ii), Income-tax Act, 2025 (corresponding to section 80JJAA, Income-tax Act, 1961).

Question 25 · 2 marks · Taxation - DT Ch 09: Deductions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Nandini Real Estates Pvt. Ltd. is a company whose return for Tax Year 2026-27 is due on 31 October 2027 under section 263(1); no report under section 172 applies. It has otherwise met the conditions for section 146 and furnished the accountant's report on 29 September 2027. Its total income exceeds ₹5,00,000. It furnishes the return on 15 November 2027 and claims the section 146 deduction. After TDS and advance tax, ₹2,40,000 remains as tax on total income determined under section 270(1). Which outcome is correct, assuming no regular assessment has yet been made?

1. Deduction allowed; fee ₹5,000; interest ₹2,400
2. Deduction denied; fee ₹5,000; interest ₹2,400 (correct answer)
3. Deduction denied; fee ₹1,000; interest ₹240
4. Deduction allowed; no fee; interest ₹2,400

Answer: B — Deduction denied; fee ₹5,000; interest ₹2,400

Explanation. Section 122(5) bars a Part C deduction, including section 146, if the return is not furnished by the section 263(1) due date or the claim is not made in that return. The 15 November return is late, so the deduction is denied. Since total income exceeds ₹5,00,000, section 428(a) fee is ₹5,000. Under section 423, delay from 1 November to 15 November is part of one month: interest = 1% × ₹2,40,000 × 1 = ₹2,400.

Where it goes wrong. Assuming that a timely accountant's report cures a late return, or applying the ₹1,000 fee threshold to income above ₹5,00,000.

Authority. Sections 122(5), 263(1), 263(4), 423(1) and 428(a), Income-tax Act, 2025 (corresponding to the timely-return restriction in section 80AC and related provisions of the Income-tax Act, 1961); section 146.