CA Inter Taxation - Income-tax Law MCQ Test 10: answer key

Question 1 · 2 marks · Chapter 9 · hard

Scenario. Mr. Devansh Mehta, aged 36 years, is employed as a senior finance manager with a multinational company in Pune. He is resident and ordinarily resident in India for P.Y. 2025-26 and does not have income from business or profession. His gross salary for the year ended 31st March 2026 was ₹12,93,000, comprising basic salary of ₹6,00,000, house rent allowance of ₹1,80,000 and other taxable salary components. He paid rent of ₹2,20,000 during the year for accommodation occupied in Pune. His employer deducted tax from his salary every month on the basis of his initial declaration under the default tax regime. Devansh had purchased a self-occupied residential flat in Pune in 2022 using a housing loan from a scheduled bank. Interest payable on the loan for P.Y. 2025-26 was ₹2,00,000, and all conditions for claiming the deduction under the normal provisions of the Act were satisfied. During the year, he contributed ₹1,50,000 towards eligible investments under section 80C and paid ₹25,000 towards medical insurance premium qualifying under section 80D. He maintained all supporting documents for his rent payments and investments. He had no capital gains, lottery winnings, agricultural income or other sources of income during the year. His employer subsequently informed him that the initial tax declaration could be reconsidered before filing his return. Devansh is now evaluating the tax consequences of continuing under the default tax regime under section 115BAC or exercising the option of shifting out of it and paying tax under the normal provisions of the Act. Assume that all the stated deductions and exemptions satisfy the applicable statutory conditions.

Compute the income-tax liability of Mr. Devansh under the default tax regime under section 115BAC for A.Y. 2026-27, including the applicable marginal relief and health and education cess.

1. His tax liability is ₹18,720, because the marginal relief reduces the income-tax payable to the amount by which his total income exceeds ₹12,00,000, followed by cess at 4%. (correct answer)
2. Rs. 11,40,000, because only basic salary and dearness allowance forming part of retirement benefits are included for perquisite valuation, while commission and bonus are completely excluded.
3. His tax liability is ₹65,208, because the income-tax of ₹62,700 is increased by cess at 4% without allowing marginal relief.
4. His tax liability is Nil, because the rebate under section 87A eliminates the entire income-tax payable whenever total income is close to ₹12,00,000.

Answer: A — His tax liability is ₹18,720, because the marginal relief reduces the income-tax payable to the amount by which his total income exceeds ₹12,00,000, followed by cess at 4%.

Working. Total income = ₹12,93,000 - ₹75,000 = ₹12,18,000. Tax = ₹20,000 + ₹40,000 + ₹2,700 = ₹62,700. Income exceeding ₹12 lakh = ₹18,000. Marginal relief = ₹62,700 - ₹18,000 = ₹44,700. Tax after relief = ₹18,000. Cess = ₹720. Final liability = ₹18,720.

Explanation. Total income under section 115BAC is ₹12,18,000 (₹12,93,000 less standard deduction of ₹75,000). Tax before marginal relief is ₹62,700: ₹20,000 on the ₹4 lakh slab, ₹40,000 on the next ₹4 lakh and ₹2,700 on ₹18,000. Since income exceeds ₹12 lakh by ₹18,000, marginal relief reduces tax to ₹18,000. Cess at 4% is ₹720, making the liability ₹18,720. Option (c) overlooks marginal relief.

Where it goes wrong. Applying the rebate threshold mechanically without examining marginal relief when total income marginally exceeds ₹12 lakh.

Authority. Chapter 9, section 115BAC: slab rates for A.Y. 2026-27; Chapter 9, section 87A: rebate and marginal relief; Chapter 9: Health and Education Cess at 4%

Question 2 · 2 marks · Chapter 9 · hard

If Mr. Devansh exercises the option of shifting out of the default tax regime, what would be his income-tax liability under the normal provisions of the Act for A.Y. 2026-27?

1. ₹56,264, because the taxable income is ₹7,08,000 after allowing HRA exemption, standard deduction and the eligible deductions under sections 24(b), 80C and 80D. (correct answer)
2. ₹64,064, because the taxable income is ₹7,33,000 after allowing HRA exemption, standard deduction and deductions under sections 80C and 80D, but not section 24(b).
3. ₹82,680, because the taxable income is ₹8,35,000 after allowing standard deduction and deductions under sections 80C, 80D and 24(b), but no HRA exemption.
4. ₹97,500, because the taxable income is ₹14,25,000 after allowing only the standard deduction and applying the normal tax slab rates.

Answer: A — ₹56,264, because the taxable income is ₹7,08,000 after allowing HRA exemption, standard deduction and the eligible deductions under sections 24(b), 80C and 80D.

Working. HRA exemption = least of ₹1,80,000, ₹1,60,000 and ₹3,00,000 = ₹1,60,000. Total income = ₹12,93,000 - ₹1,60,000 - ₹50,000 - ₹1,50,000 - ₹25,000 - ₹2,00,000 = ₹7,08,000. Tax = ₹12,500 + ₹41,600 = ₹54,100. Cess = ₹2,164. Total = ₹56,264.

Explanation. HRA exemption is the least of ₹1,80,000, ₹1,60,000 (rent less 10% of basic salary) and ₹3,00,000 (50% of basic salary), hence ₹1,60,000. After standard deduction of ₹50,000, section 80C deduction of ₹1,50,000, section 80D deduction of ₹25,000 and section 24(b) deduction of ₹2,00,000, total income is ₹7,08,000. Tax is ₹54,100 plus cess of ₹2,164. Option (b) incorrectly omits the housing-loan interest deduction.

Where it goes wrong. Confusing the restrictions under section 115BAC with the deductions and exemptions available under the optional tax regime.

Authority. Chapter 3, Unit 1: HRA exemption under section 10(13A); Chapter 3, Unit 1: Standard deduction from salary; Chapter 3, Unit 2: Section 24(b); Chapter 6: Sections 80C and 80D; Chapter 1: Normal slab rates for individuals

Question 3 · 2 marks · Chapter 9 · medium

Considering the respective tax liabilities computed under both regimes, which option should Mr. Devansh choose for A.Y. 2026-27?

1. He should shift to the optional tax regime because the availability of deductions under sections 80C and 80D necessarily makes that regime more beneficial.
2. He should continue under the default tax regime because his liability of ₹18,720 is lower than the liability of ₹56,264 under the normal provisions. (correct answer)
3. He should continue under the default tax regime because his liability is ₹18,000, whereas the optional regime results in a liability of ₹56,264, and cess is not payable under the default regime.
4. He should shift to the optional tax regime because marginal relief under section 87A is available only under the normal provisions of the Act.

Answer: B — He should continue under the default tax regime because his liability of ₹18,720 is lower than the liability of ₹56,264 under the normal provisions.

Working. Default regime liability = ₹18,720. Optional regime liability = ₹56,264. Tax saving under default regime = ₹56,264 - ₹18,720 = ₹37,544. The default tax regime is preferable.

Explanation. The default regime results in a liability of ₹18,720, whereas the optional regime results in ₹56,264. The default regime is therefore more beneficial by ₹37,544. The availability of deductions under the optional regime does not automatically make it preferable; the final tax liabilities must be compared. Option (c) reaches the same regime choice but incorrectly excludes cess from the default-regime liability.

Where it goes wrong. Choosing a regime merely because it permits more deductions rather than comparing the resulting tax liabilities.

Authority. Chapter 9: Computation and comparison of tax liability under both regimes; Chapter 9: Section 115BAC; Chapter 9: Section 87A and Health and Education Cess

Question 4 · 2 marks · Chapter 4 · hard

Scenario. Mr. Raghav Sinha and his wife, Mrs. Kavya Sinha, are residents and ordinarily residents of India. Raghav is a director in a manufacturing company and has a substantial interest in the concern. Kavya is a qualified architect employed by the same company. During P.Y. 2025-26, she received remuneration of ₹9,00,000, wholly attributable to the application of her professional knowledge, technical qualifications and experience. On 1st April 2025, Raghav transferred listed equity shares and listed debentures worth ₹12,00,000 to Kavya without consideration. During the year, these investments generated dividend income of ₹80,000 and interest income of ₹30,000 respectively. Kavya deposited the dividend received into her own savings account and earned additional interest of ₹5,000 on that deposit. The couple also has a minor daughter, Siya, aged 15 years, who participated in music competitions and received prizes of ₹60,000 through activities involving her musical talent. Separately, she earned interest of ₹22,000 on fixed deposits created out of ₹3,00,000 gifted to her by Raghav. Both parents have independent taxable income before considering Siya's income. Raghav's income is ₹16,00,000 and Kavya's income is ₹8,00,000. They have exercised the option of shifting out of the default tax regime for A.Y. 2026-27, and the marriage between them subsists throughout the previous year. Raghav also carries on an independent trading business. For P.Y. 2025-26, he incurred a business loss of ₹90,000. His other computations disclosed a loss from house property of ₹2,60,000 and short-term capital loss of ₹1,20,000. He also earned long-term capital gains of ₹2,00,000. His salary income was ₹16,00,000. Assume the losses are current-year losses, the capital assets satisfy the relevant classification conditions and the return of income is furnished within the prescribed due date.

What amount of income arising from the assets transferred by Raghav to Kavya is includible in Raghav's total income under the clubbing provisions for P.Y. 2025-26?

1. Rs. 7,40,000, because indexed cost of acquisition is allowable for long-term capital assets acquired prior to 23 July 2024, and the transfer expenses are fully deductible from sale consideration.
2. ₹1,10,000, because dividend income and interest on the transferred debentures are clubbed, but interest arising from reinvestment of dividend income is not clubbed. (correct answer)
3. ₹10,00,000, because the dividend, debenture interest and entire remuneration received by Kavya must be included in Raghav's income.
4. Nil, because the investments were transferred before the income arose and Kavya independently received the dividend and interest.

Answer: B — ₹1,10,000, because dividend income and interest on the transferred debentures are clubbed, but interest arising from reinvestment of dividend income is not clubbed.

Working. Dividend income = ₹80,000. Debenture interest = ₹30,000. Amount clubbed = ₹1,10,000. Interest on reinvested dividend = ₹5,000, not clubbed. Kavya's professional remuneration = ₹9,00,000, not clubbed.

Explanation. Under section 64(1)(iv), income arising to a spouse from assets transferred without adequate consideration is clubbed with the transferor's income. Thus, ₹80,000 dividend and ₹30,000 debenture interest are clubbed. The subsequent ₹5,000 interest earned by reinvesting dividend income is income from accretion and is not clubbed. Kavya's remuneration is also excluded because it is wholly attributable to her professional knowledge and experience, attracting the statutory exception under section 64(1)(ii).

Where it goes wrong. Including income generated by reinvestment of the original income and spouse remuneration despite the professional-qualification exception.

Authority. Chapter 4, section 64(1)(iv): Transfer of assets to spouse; Chapter 4, section 64(1)(ii): Remuneration attributable to professional knowledge and experience; Chapter 4: Distinction between income from transferred assets and accretion

Question 5 · 2 marks · Chapter 4 · hard

Determine the amount of Siya's income includible in Raghav's total income for P.Y. 2025-26 after considering the applicable exemption.

1. ₹22,000, because interest income is clubbed with Raghav, but exemption under section 10(32) is unavailable even under the optional tax regime.
2. Rs. 1,50,000, because interest on housing loan for self-occupied property is deductible up to a maximum limit of Rs. 1,50,000 under the normal provisions of section 24(b) of the Act.
3. ₹20,500, because interest income of ₹22,000 is clubbed with the income of the parent having higher income after allowing exemption of ₹1,500, whereas music prizes arising from application of talent are excluded. (correct answer)
4. ₹60,000, because income derived from musical competitions is always included in the income of the parent having higher income, irrespective of the minor's talent.

Answer: C — ₹20,500, because interest income of ₹22,000 is clubbed with the income of the parent having higher income after allowing exemption of ₹1,500, whereas music prizes arising from application of talent are excluded.

Working. Parent with higher income = Raghav (₹16,00,000). Passive interest clubbed = ₹22,000. Exemption under section 10(32) = ₹1,500. Amount includible = ₹20,500. Music competition prizes of ₹60,000 are excluded under the skill-and-talent exception.

Explanation. Section 64(1A) generally includes minor children's income in the income of the parent having higher income before such inclusion. Raghav's income of ₹16 lakh exceeds Kavya's ₹8 lakh. However, income arising from an activity involving the minor's skill or talent is excluded. Thus, the ₹60,000 music prizes are not clubbed. Interest of ₹22,000 is clubbed after exemption of ₹1,500 under section 10(32), available because Raghav exercises the optional tax regime.

Where it goes wrong. Ignoring the skill-and-talent exception or assuming that the exemption under section 10(32) is available under the default tax regime.

Authority. Chapter 4, section 64(1A): Clubbing of minor child's income; Chapter 4, section 10(32): Exemption of ₹1,500 per minor child; Chapter 4: Exception for income involving minor's skill, talent or specialised knowledge

Question 6 · 2 marks · Chapter 5 · hard

After applying the current-year set-off provisions under the normal provisions of the Act, what is the aggregate amount of losses that Raghav can carry forward, assuming all other conditions are satisfied?

1. ₹60,000, because the business loss can be adjusted against salary income and only the unabsorbed house property loss can be carried forward.
2. ₹2,70,000, comprising house property loss of ₹60,000, business loss of ₹90,000 and short-term capital loss of ₹1,20,000, since capital losses cannot be adjusted against long-term capital gains.
3. ₹1,50,000, comprising house property loss of ₹60,000 and business loss of ₹90,000, since the short-term capital loss is fully adjusted against long-term capital gains. (correct answer)
4. ₹90,000, because the entire house property loss can be adjusted against salary and capital gains, whereas business loss cannot be carried forward.

Answer: C — ₹1,50,000, comprising house property loss of ₹60,000 and business loss of ₹90,000, since the short-term capital loss is fully adjusted against long-term capital gains.

Working. House property loss = ₹2,60,000. Current-year inter-head set-off = ₹2,00,000. Carry forward = ₹60,000. Business loss = ₹90,000, not adjustable against salary. STCL ₹1,20,000 is adjusted against LTCG ₹2,00,000. Unabsorbed LTCG = ₹80,000. Aggregate losses carried forward = ₹60,000 + ₹90,000 = ₹1,50,000.

Explanation. Under section 71(3A), house property loss can be adjusted against income under other heads only up to ₹2 lakh, leaving ₹60,000. Business loss cannot be set off against salary income under section 71(2A), so ₹90,000 remains available for carry forward. Short-term capital loss can be set off against long-term capital gains, leaving no unabsorbed capital loss. Therefore, aggregate carry-forward losses are ₹1,50,000. Option (b) incorrectly restricts adjustment of short-term capital loss.

Where it goes wrong. Applying the ₹2 lakh restriction to the entire house property loss rather than treating the excess as carry forward, and incorrectly preventing short-term capital loss from being adjusted against long-term capital gains.

Authority. Chapter 5: Section 71(3A), restriction on inter-head set-off of house property loss; Chapter 5: Section 71(2A), restriction on business loss against salary; Chapter 5: Section 70, inter-source set-off of capital losses; Chapter 5: Sections 72 and 74, carry forward of business and capital losses

Question 7 · 2 marks · Chapter 2 – Residence and Scope of Total Income · medium

Scenario. Nikhil Verma, an Indian citizen residing in Germany after leaving India on 15 March 2025 for employment there, visited India during the previous year 2025-26. His total stay in India during that year was 90 days, and his stay in India during the four preceding previous years was 500 days. He earned salary of ₹15,00,000 for services rendered entirely in Germany, credited to his German bank account. He also earned ₹80,000 as interest on a German fixed deposit, credited outside India. Neither amount was received or deemed to be received in India. He owns a residential property in Jaipur, from which his income under the head 'Income from house property', computed after the applicable deduction under section 24(a), is ₹2,10,000.

Determine Nikhil's residential status for the previous year 2025-26 and the amount of income taxable in India.

1. Nikhil is a resident and ordinarily resident, and his entire income of ₹17,90,000 is taxable in India because he has stayed in India for more than 60 days in the previous year.
2. Nikhil is a resident but not ordinarily resident, and ₹17,90,000 is taxable in India because his stay in India exceeds 60 days and his preceding four-year stay exceeds 365 days.
3. Nikhil is a non-resident, but ₹17,90,000 is taxable in India because the salary and foreign deposit interest of an Indian citizen are taxable in India irrespective of where they are received.
4. Nikhil is a non-resident, and ₹2,10,000 is taxable in India because, as an Indian citizen residing abroad who visits India and has income other than foreign-source income below ₹15 lakh, he is subject to the 182-day test, while his Indian property income is taxable in India. (correct answer)

Answer: D — Nikhil is a non-resident, and ₹2,10,000 is taxable in India because, as an Indian citizen residing abroad who visits India and has income other than foreign-source income below ₹15 lakh, he is subject to the 182-day test, while his Indian property income is taxable in India.

Working. Total stay in India during P.Y. 2025-26: 90 days. As Nikhil is an Indian citizen residing abroad who visits India and has ₹2,10,000 income other than foreign-source income, the applicable residence test is 182 days. He is therefore non-resident. Foreign salary and German fixed-deposit interest are not taxable on the facts given. Jaipur property income of ₹2,10,000 is taxable in India.

Explanation. Nikhil is an Indian citizen residing abroad who visits India. His income other than foreign-source income is ₹2,10,000, below ₹15 lakh, so the 182-day visit test applies under section 6(1). His 90-day stay makes him non-resident. Under section 5(2), his German salary and deposit interest are not taxable on these facts, while income from the Jaipur property accrues in India. Therefore, ₹2,10,000 is taxable in India.

Where it goes wrong. Applying the general 60-days-plus-365-days test without considering the 182-day visit rule where non-foreign-source income does not exceed ₹15 lakh.

Authority. Chapter 2 – Residence and Scope of Total Income: Section 6(1), visit-to-India rule for an Indian citizen residing abroad.; Chapter 2 – Residence and Scope of Total Income: Section 5(2), scope of total income of a non-resident.; Chapter 4 – Income from House Property: Income from property situated in India.

Question 8 · 1 marks · Chapter 7 · hard

Scenario. PQR Ltd., a company, had turnover of ₹12.50 crore during F.Y. 2024-25. During F.Y. 2025-26, it purchased goods worth ₹45,00,000 from a resident seller and subsequently credited another invoice of ₹29,00,000 to the same seller on 20th February 2026. The seller's PAN was inoperative on that date. However, the seller linked Aadhaar with PAN and the PAN became operative on 15th April 2026. Assume the transactions are otherwise covered by the applicable TDS provisions and the seller has furnished the PAN.

What is the amount of tax PQR Ltd. is required to deduct at source on the transaction dated 20th February 2026, considering section 194Q, section 206AA and the applicable CBDT circular?

1. Nil, because the seller's PAN was inoperative on the date of credit and tax deduction becomes applicable only after the PAN is made operative.
2. ₹2,900, because tax is deductible at 0.1% on the entire invoice value of ₹29 lakh without considering the earlier purchases.
3. Rs. 50,000, because deduction under section 80D is allowed up to Rs. 25,000 for self and family, plus an additional deduction of Rs. 25,000 for parents who are senior citizens.
4. ₹2,400, because tax is deductible at 0.1% on purchases exceeding ₹50 lakh and the subsequent activation of PAN within the prescribed period attracts relief from the higher deduction rate. (correct answer)

Answer: D — ₹2,400, because tax is deductible at 0.1% on purchases exceeding ₹50 lakh and the subsequent activation of PAN within the prescribed period attracts relief from the higher deduction rate.

Working. Aggregate purchases = ₹45,00,000 + ₹29,00,000 = ₹74,00,000. Amount exceeding threshold = ₹74,00,000 - ₹50,00,000 = ₹24,00,000. TDS = ₹24,00,000 × 0.1% = ₹2,400. PAN became operative on 15.04.2026, within two months from the end of February 2026. Higher-rate relief applies.

Explanation. PQR Ltd.'s preceding-year turnover exceeds ₹10 crore, and aggregate purchases from the resident seller exceed ₹50 lakh. Under section 194Q, TDS at 0.1% applies to the excess ₹24 lakh, giving ₹2,400. Although PAN was initially inoperative, Circular No. 9/2025 dated 21.07.2025 provides relief where PAN becomes operative within two months from the end of the month of payment or credit. Activation on 15th April falls within this period.

Where it goes wrong. Applying the higher PAN-related deduction rate without considering the subsequent activation relief under Circular No. 9/2025, or calculating TDS on the entire invoice instead of the amount exceeding the threshold.

Authority. Chapter 7, section 194Q: TDS on purchase of goods; Chapter 7, section 206AA: Higher TDS for failure to furnish operative PAN; Statutory Update for January 2027, Chapter 8: Circular No. 9/2025 dated 21.07.2025