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CA Inter Taxation - Income-tax Law MCQ Test 1: answer key

This practice test covers Income-tax Law for CA Intermediate Group 1, written for the January 2027 attempt. It carries 15 marks in 30 minutes, with no negative marking, and sets 8 questions in 4 case scenarios: read the facts, then apply the law. The scenarios work through salaries and perquisites, residential status and the scope of total income, deductions from gross total income, and the basics of the default tax regime. The law applied is the Income-tax Act 1961 as amended by the Finance Act 2025, with notifications and circulars up to 30 June 2026, for assessment year 2026-27. Sit it in exam mode for a timed paper with a certificate carrying your name and score, or in practice mode to read why each answer is right straight after you choose it. There is no sign-up step, and nothing about you is stored on a server. Questions are prepared with AI tools and cross-checked by independent solvers; they are not reviewed by a Chartered Accountant. This is a practice test by HeyArtha, not issued by or affiliated with ICAI. If you spot a mistake in a question, use the Report a mistake button on it.

8 questions across 4 chapters, 15 marks and 30 minutes in the timed paper. Every answer below is shown with the working behind it and the authority it rests on.

Law and standards used: Income-tax Act 1961 as amended by Finance Act 2025, notifications and circulars up to 30 June 2026, AY 2026-27.

Questions
8
Marks
15
Time limit
30 minutes
Attempt
January 2027
Group
Group 1
Law basis
Income-tax Act 1961 as amended by Finance Act 2025, notifications and circulars up to 30 June 2026, AY 2026-27
Content as of
2026-10-31

Chapters covered

Questions, answers and explanations

Question 1 · 2 marks · Chapter 3, Unit 1: Salaries · easy

Scenario. During the previous year 2025-26, Mr. Aarav Mehta, an employee of a private company, received basic salary of ₹50,000 per month, dearness allowance of ₹10,000 per month (forming part of pay for retirement benefits), and an annual bonus of ₹50,000. He is neither a director nor an employee having substantial interest in the company. Throughout the year, his employer provided him with an employer-owned motor car having engine capacity exceeding 1.6 litres, together with a chauffeur, for both official and personal purposes. The employer bears all running and maintenance expenses of the car and did not recover any amount from him for this facility. He received no other allowances or perquisites. Aarav pays tax under the default tax regime under section 115BAC. Assume that he was employed throughout the previous year and that no other deduction or exemption is applicable.

Considering Notification No. 133/2025 dated 18 August 2025, whether Aarav qualifies as a specified employee under section 17(2)(iii) for taxation of the motor-car facility provided by his employer?

  1. No, because the prescribed salary limit continues to be ₹2,50,000.
  2. No, because his salary must exceed ₹10,00,000.
  3. No, because only directors and employees having substantial interest can be specified employees.
  4. Yes, because his salary, excluding non-monetary benefits, exceeds the prescribed limit of ₹4,00,000. (correct answer)

Answer: D — Yes, because his salary, excluding non-monetary benefits, exceeds the prescribed limit of ₹4,00,000.

Explanation. Notification No. 133/2025 inserted Rule 3C prescribing ₹4,00,000 as the salary threshold for determining specified employees under section 17(2)(iii). Aarav's salary before including the motor-car facility is ₹7,70,000 (₹6,00,000 basic salary + ₹1,20,000 dearness allowance + ₹50,000 bonus). He therefore exceeds the prescribed threshold. The provision also independently covers directors and employees having substantial interest, but neither condition is necessary here.

Where it goes wrong. Applying the earlier salary threshold instead of the ₹4,00,000 limit introduced by Notification No. 133/2025.

Authority. Income-tax Act, 1961, section 17(2)(iii); Income-tax Rules, 1962, Rule 3C, inserted through Notification No. 133/2025 dated 18.08.2025; ICAI January 2027 Statutory Update, Chapter 3, Unit 1: Salaries

Question 2 · 2 marks · Chapter 3, Unit 1: Salaries · medium

What is the taxable value of the motor-car perquisite provided to Aarav for the previous year 2025-26? The vehicle is employer-owned, its engine capacity exceeds 1.6 litres, and a chauffeur is provided for both official and personal use. Ignore rounding.

  1. ₹28,800
  2. ₹39,600 (correct answer)
  3. ₹21,600
  4. ₹43,200

Answer: B — ₹39,600

Working. Monthly perquisite value = ₹2,400 + ₹900 for chauffeur = ₹3,300. Annual perquisite value = ₹3,300 × 12 months = ₹39,600.

Explanation. Under Rule 3(2), where an employer-owned motor car with engine capacity exceeding 1.6 litres is used for both official and personal purposes and a chauffeur is provided, the prescribed monthly perquisite value is ₹3,300. The vehicle was available throughout all 12 months. Therefore, the taxable value is ₹3,300 × 12 = ₹39,600. The tempting ₹28,800 option applies the monthly value of ₹2,400 applicable where a chauffeur is not provided.

Where it goes wrong. Using the monthly valuation applicable to a motor car without a chauffeur or to a vehicle with a different engine capacity.

Authority. Income-tax Rules, 1962, Rule 3(2); ICAI Study Material, July 2025, Chapter 3, Unit 1: Salaries, motor-car perquisite valuation; ICAI Study Material, July 2025, Chapter 3, Unit 1, illustration concerning employer-owned motor cars

Question 3 · 2 marks · Chapter 3, Unit 1: Salaries · hard

Compute the income chargeable under the head Salaries in Aarav's hands for AY 2026-27 under the default tax regime. Assume the standard deduction is available and no other deduction applies. Ignore rounding.

  1. ₹7,59,600
  2. ₹6,95,000
  3. ₹7,34,600 (correct answer)
  4. ₹8,09,600

Answer: C — ₹7,34,600

Working. Basic salary = ₹50,000 × 12 = ₹6,00,000. Dearness allowance = ₹10,000 × 12 = ₹1,20,000. Annual bonus = ₹50,000. Motor-car perquisite = ₹39,600. Gross salary = ₹6,00,000 + ₹1,20,000 + ₹50,000 + ₹39,600 = ₹8,09,600. Less: Standard deduction under section 16(ia) = ₹75,000. Income chargeable under Salaries = ₹8,09,600 − ₹75,000 = ₹7,34,600.

Explanation. Aarav's gross salary includes basic pay, dearness allowance, bonus and the taxable motor-car perquisite. These aggregate to ₹8,09,600. Under the default tax regime, the standard deduction under section 16(ia) is ₹75,000. Consequently, taxable salary is ₹7,34,600. Option (a) is a tempting error because it deducts only ₹50,000, the standard deduction applicable under the normal tax regime rather than the default regime.

Where it goes wrong. Applying the optional-regime standard deduction of ₹50,000 instead of ₹75,000, or omitting the motor-car perquisite.

Authority. Income-tax Act, 1961, section 16(ia); Income-tax Act, 1961, section 115BAC; Income-tax Rules, 1962, Rule 3(2); ICAI Study Material, July 2025, Chapter 3, Unit 1: Salaries

Question 4 · 2 marks · Chapter 2: Residence and Scope of Total Income · easy

Scenario. Ms. Leena Kapoor is a Canadian citizen and a person of Indian origin. She came to India on a visit during the previous year 2025-26 and stayed for 125 days. Her total stay in India during the four previous years immediately preceding 2025-26 was 400 days. During 2025-26, she earned salary of ₹9,00,000 from employment in Canada for services rendered and received there. She also earned ₹6,00,000 from a consultancy profession set up in India, although the services were rendered and the fees received in Canada. Further, she earned gross rental income of ₹6,00,000 from an Indian house property, dividend income of ₹1,50,000 from an Indian company and business profits of ₹4,00,000 from a business carried on in India. Assume the house property qualifies for the standard deduction under section 24(a), and no other deductions or exemptions are applicable.

Determine Leena's residential status for AY 2026-27 under the Income-tax Act, 1961.

  1. Non-resident, because her stay in India is less than 182 days.
  2. Deemed resident under section 6(1A), because her income exceeds ₹15,00,000.
  3. Resident but not ordinarily resident, because she satisfies the special 120-day visit condition and the applicable preceding-stay condition. (correct answer)
  4. Resident and ordinarily resident, because her stay during the preceding four years exceeds 365 days.

Answer: C — Resident but not ordinarily resident, because she satisfies the special 120-day visit condition and the applicable preceding-stay condition.

Working. Stay during PY 2025-26 = 125 days. Stay during preceding four previous years = 400 days. Non-foreign-source income = ₹15,70,000, exceeding ₹15,00,000. The 120-day condition and 365-day preceding-stay condition are satisfied. Residential status = Resident but not ordinarily resident (RNOR).

Explanation. An Indian citizen or person of Indian origin visiting India with non-foreign-source income exceeding ₹15 lakh can become resident if the relevant-year stay is at least 120 days but less than 182 days and the preceding four-year stay is at least 365 days. Leena satisfies these conditions with 125 days and 400 days respectively. Such an individual is treated as RNOR under section 6(6). Section 6(1A) does not apply because Leena is not an Indian citizen.

Where it goes wrong. Applying the ordinary 182-day condition without considering the special visit provision, or incorrectly applying deemed residence to a person of Indian origin who is not an Indian citizen.

Authority. Income-tax Act, 1961, section 6(1); Income-tax Act, 1961, section 6(6); ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, residential status of individuals

Question 5 · 2 marks · Chapter 2: Residence and Scope of Total Income · medium

Which of the following correctly describes the tax treatment of Leena's Canadian salary and consultancy income under the scope-of-total-income provisions?

  1. Canadian salary is not taxable, but consultancy income is taxable because it is derived from a profession set up in India. (correct answer)
  2. Neither income is taxable in India because both were received outside India.
  3. Both incomes are taxable in India because Leena is a resident.
  4. Canadian salary is taxable, but consultancy income is not taxable because the services were rendered outside India.

Answer: A — Canadian salary is not taxable, but consultancy income is taxable because it is derived from a profession set up in India.

Explanation. An RNOR is taxable on income received or deemed to be received in India, income accruing or deemed to accrue in India, and foreign income derived from a business controlled in or profession set up in India. Leena's Canadian employment salary is earned and received outside India and has no stated Indian connection. Her consultancy income, however, is derived from a profession set up in India and is therefore included. Foreign receipt alone does not exclude this professional income.

Where it goes wrong. Treating all foreign-received income as exempt for an RNOR, without applying the exception for a business controlled in or profession set up in India.

Authority. Income-tax Act, 1961, section 5(1); Income-tax Act, 1961, section 6(6); ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, scope of total income of RNOR

Question 6 · 2 marks · Chapter 2: Residence and Scope of Total Income · hard

Compute Leena's total income chargeable to tax in India for AY 2026-27, considering her residential status. Apply the deduction under section 24(a) to gross rental income. Assume no other deductions or exemptions. Ignore rounding.

  1. ₹9,70,000
  2. ₹15,70,000 (correct answer)
  3. ₹14,20,000
  4. ₹24,70,000

Answer: B — ₹15,70,000

Working. Consultancy income from profession set up in India = ₹6,00,000. House-property income: Gross annual income = ₹6,00,000. Less: Standard deduction under section 24(a), 30% = ₹1,80,000. Income from house property = ₹4,20,000. Indian dividend income = ₹1,50,000. Indian business profits = ₹4,00,000. Canadian employment salary = Excluded. Total income = ₹6,00,000 + ₹4,20,000 + ₹1,50,000 + ₹4,00,000 = ₹15,70,000.

Explanation. As an RNOR, Leena's foreign employment salary is excluded because it accrues and is received outside India and is not connected with a business controlled in or profession set up in India. Her consultancy income from a profession set up in India remains taxable. Indian house-property income is taxable after the 30% deduction, and Indian dividend and business profits are also taxable. Their aggregate is ₹15,70,000. Option (d) incorrectly includes the Canadian employment salary.

Where it goes wrong. Including foreign employment salary in RNOR income or overlooking the 30% standard deduction from house-property income.

Authority. Income-tax Act, 1961, section 5(1); Income-tax Act, 1961, section 24(a); Income-tax Act, 1961, section 6(6); ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, scope of total income and computation illustrations

Question 7 · 2 marks · Chapter 6: Deductions from Gross Total Income · easy

Scenario. Mr. Dev Sharma, an individual, exercises the option to shift out of the default tax regime for AY 2026-27. During FY 2025-26, he contributed ₹80,000 to PPF, paid ₹45,000 as tuition fees for his two children pursuing full-time education in India, and repaid ₹40,000 towards the principal of a housing loan taken from an eligible financial institution. All payments satisfy the applicable conditions for deduction under section 80C.

What is the maximum deduction allowable to Dev under section 80C for AY 2026-27?

  1. ₹50,000
  2. ₹1,30,000
  3. ₹1,65,000
  4. ₹1,50,000 (correct answer)

Answer: D — ₹1,50,000

Working. PPF contribution = ₹80,000. Eligible tuition fees = ₹45,000. Eligible housing-loan principal repayment = ₹40,000. Aggregate eligible payments = ₹80,000 + ₹45,000 + ₹40,000 = ₹1,65,000. Maximum deduction under section 80CCE = ₹1,50,000. Allowable deduction under section 80C = Lower of ₹1,65,000 and ₹1,50,000 = ₹1,50,000.

Explanation. Contributions to PPF, eligible tuition fees for up to two children pursuing full-time education in India, and repayment of eligible housing-loan principal qualify for deduction under section 80C. Dev's eligible payments total ₹1,65,000. However, section 80CCE restricts the aggregate deduction under sections 80C, 80CCC and 80CCD(1) to ₹1,50,000. Therefore, the allowable deduction under section 80C is ₹1,50,000.

Where it goes wrong. Claiming the entire eligible payment of ₹1,65,000 without applying the overall ceiling of ₹1,50,000.

Authority. Income-tax Act, 1961, section 80C; Income-tax Act, 1961, section 80CCE; ICAI Study Material, July 2025, Chapter 6: Deductions from Gross Total Income, deduction under section 80C

Question 8 · 1 marks · Chapter 1: Basic Concepts · medium

Scenario. Ms. Ira earns total income of ₹50,40,000 for AY 2026-27 and is taxable under the default tax regime under section 115BAC. Her entire income is ordinary income taxable at the applicable slab rates. She has no special-rate income, and no rebate or other tax adjustment is available. Determine the marginal relief applicable in respect of surcharge. All amounts are in rupees.

Calculate the marginal relief available to Ira in respect of surcharge. Apply the applicable default-regime slabs and surcharge rates for AY 2026-27. Ignore rounding.

  1. ₹81,200 (correct answer)
  2. ₹1,09,200
  3. ₹1,21,200
  4. ₹40,000

Answer: A — ₹81,200

Working. Step 1: Tax on ₹50,40,000 under default-regime slabs: ₹4,00,000–₹8,00,000 @ 5% = ₹20,000. ₹8,00,000–₹12,00,000 @ 10% = ₹40,000. ₹12,00,000–₹16,00,000 @ 15% = ₹60,000. ₹16,00,000–₹20,00,000 @ 20% = ₹80,000. ₹20,00,000–₹24,00,000 @ 25% = ₹1,00,000. ₹24,00,000–₹50,40,000 @ 30% = ₹7,92,000. Total income-tax = ₹10,92,000. Step 2: Add surcharge @ 10% = ₹1,09,200. Tax including surcharge = ₹12,01,200. Step 3: Tax on ₹50,00,000 = ₹10,80,000. Excess tax = ₹12,01,200 − ₹10,80,000 = ₹1,21,200. Step 4: Income exceeding ₹50,00,000 = ₹40,000. Tax payable after marginal relief = ₹10,80,000 + ₹40,000 = ₹11,20,000. Marginal relief = ₹12,01,200 − ₹11,20,000 = ₹81,200 (equivalently ₹1,21,200 − ₹40,000).

Explanation. At total income of ₹50,40,000, tax is ₹10,92,000 and surcharge at 10% is ₹1,09,200, so tax with surcharge is ₹12,01,200. Marginal relief limits the total payable to the tax on ₹50,00,000 (₹10,80,000) plus the income earned above ₹50 lakh (₹40,000), i.e. ₹11,20,000. Relief is therefore ₹12,01,200 − ₹11,20,000 = ₹81,200. Option (c) is the extra tax before relief, and option (d) is only the excess income.

Where it goes wrong. Confusing the excess tax before marginal relief with the actual marginal relief, or deducting the excess income incorrectly.

Authority. Income-tax Act, 1961, section 115BAC; Finance Act, 2025, First Schedule, Part I, applicable tax rates and surcharge for AY 2026-27; ICAI Study Material, July 2025, Chapter 1: Basic Concepts, surcharge and marginal relief under the default tax regime

Authorities cited in this paper

Income-tax Act, 1961, section 17(2)(iii) · Income-tax Rules, 1962, Rule 3C, inserted through Notification No. 133/2025 dated 18.08.2025 · ICAI January 2027 Statutory Update, Chapter 3, Unit 1: Salaries · Income-tax Rules, 1962, Rule 3(2) · ICAI Study Material, July 2025, Chapter 3, Unit 1: Salaries, motor-car perquisite valuation · ICAI Study Material, July 2025, Chapter 3, Unit 1, illustration concerning employer-owned motor cars · Income-tax Act, 1961, section 16(ia) · Income-tax Act, 1961, section 115BAC · ICAI Study Material, July 2025, Chapter 3, Unit 1: Salaries · Income-tax Act, 1961, section 6(1) · Income-tax Act, 1961, section 6(6) · ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, residential status of individuals · Income-tax Act, 1961, section 5(1) · ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, scope of total income of RNOR · Income-tax Act, 1961, section 24(a) · ICAI Study Material, July 2025, Chapter 2: Residence and Scope of Total Income, scope of total income and computation illustrations · Income-tax Act, 1961, section 80C · Income-tax Act, 1961, section 80CCE · ICAI Study Material, July 2025, Chapter 6: Deductions from Gross Total Income, deduction under section 80C · Finance Act, 2025, First Schedule, Part I, applicable tax rates and surcharge for AY 2026-27 · ICAI Study Material, July 2025, Chapter 1: Basic Concepts, surcharge and marginal relief under the default tax regime

Questions people ask

What does this test cover?

It covers the Income-tax Law part of CA Intermediate Group 1, written for the January 2027 attempt. The 8 questions sit in 4 case scenarios, and each scenario draws on one chapter: Basic Concepts, Residence and Scope of Total Income, Salaries, and Deductions from Gross Total Income. Every scenario gives you a short set of facts and then asks you to apply a provision to them, in the way the paper does.

How long is the test, and how is it marked?

The test runs for 30 minutes and carries 15 marks. Seven questions are worth 2 marks each and the last one is worth 1 mark. There is no negative marking, so a wrong answer costs you nothing. The clock keeps running through a refresh, and the paper submits itself when the time is up.

Which law does this test apply?

The test applies the Income-tax Act 1961 as amended by the Finance Act 2025, with notifications and circulars up to 30 June 2026, for assessment year 2026-27. The content is dated 31 October 2026 and the test is written for the January 2027 attempt. After you submit, each answer comes with the provision it turns on, so you can see where the answer came from.

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