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CA Inter Taxation - Income-tax Law MCQ Test 5: answer key

Salaries, house property, business income, capital gains and the set-off of losses are the heads of income this practice test works through for CA Intermediate Group 1 students preparing for the January 2027 attempt. Eight questions sit in four short case scenarios, and you read the facts before answering its questions. It covers Chapter 3, Unit 1: Salaries, Chapter 3, Unit 2: Income from House Property, Chapter 3, Unit 3: Profits and Gains of Business or Profession, Chapter 3, Unit 4: Capital Gains, Chapter 5: Aggregation of Income, Set-off and Carry Forward of Losses, and Chapter 9: Income Tax Liability - Computation and Optimisation. The situations deal with house rent exemption, a let-out flat, cash purchases and depreciation, a short-term capital gain and a loss carried forward. The paper carries 15 marks, the time limit is 30 minutes and there is no negative marking. The law applied is the Income-tax Act 1961 as amended by Finance Act 2025, notifications and circulars up to 30 June 2026, AY 2026-27, stated as at 31 October 2026. Questions are prepared with AI tools and cross-checked by independent solvers; they are not reviewed by a Chartered Accountant.

8 questions across 6 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 · medium

Scenario. Ms. Aditi is employed by a private company and has exercised the option to shift out of the default tax regime for P.Y. 2025-26. Her annual basic salary is ₹2,00,000, dearness allowance forming part of retirement benefits is ₹40,000 and house rent allowance is ₹1,20,000. She paid rent of ₹2,00,000 for accommodation in Bhopal. She is neither a director nor an employee having substantial interest in her employer company. Her employer also paid ₹36,000 to a personal servant for services provided to her. Aditi owns a separate residential flat at Indore, let out throughout the previous year. Its municipal value, fair rent and standard rent are ₹4,80,000, ₹5,40,000 and ₹5,10,000 respectively. Actual rent was ₹48,000 per month. She paid municipal taxes of ₹48,000 and interest on the housing loan of ₹1,20,000 during the year. There was no vacancy or unrealised rent.

What is Aditi's income chargeable under the head Salaries for P.Y. 2025-26 after considering the exemption for HRA and the deduction under section 16? All amounts are in rupees; no rounding is required.

  1. ₹2,39,000
  2. ₹2,50,000
  3. ₹2,14,000 (correct answer)
  4. ₹2,64,000

Answer: C — ₹2,14,000

Working. Salary for HRA = Basic salary + DA forming part of retirement benefits = ₹2,00,000 + ₹40,000 = ₹2,40,000. HRA received = ₹1,20,000. Rent paid minus 10% of salary = ₹2,00,000 - 10% of ₹2,40,000 = ₹1,76,000. 40% of salary, since Bhopal is not one of the specified metropolitan cities = 40% × ₹2,40,000 = ₹96,000. HRA exemption = Least of ₹1,20,000, ₹1,76,000 and ₹96,000 = ₹96,000. Gross monetary salary = ₹2,00,000 + ₹40,000 + ₹1,20,000 = ₹3,60,000. Less: HRA exemption = ₹96,000. Salary after HRA exemption = ₹2,64,000. Less: Standard deduction under section 16(ia) = ₹50,000. Income chargeable under Salaries = ₹2,14,000.

Explanation. HRA exemption is the least of ₹1,20,000, rent paid less 10% of salary (₹1,76,000), and 40% of salary (₹96,000). Therefore, exemption is ₹96,000. Gross monetary salary is ₹3,60,000. After HRA exemption and the ₹50,000 standard deduction applicable under the optional tax regime, salary income is ₹2,14,000. Option (a) incorrectly applies the ₹75,000 standard deduction available under the default regime.

Where it goes wrong. Applying the default-regime standard deduction of ₹75,000 instead of ₹50,000 under normal provisions, or including a non-taxable personal-servant benefit.

Authority. Section 10(13A); Section 16(ia); Chapter 3, Unit 1: Salaries

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

Considering Notification No. 133/2025 dated 18.8.2025 and the prescribed salary limit for specified employees, what amount of the ₹36,000 personal-servant facility is taxable as a perquisite in Aditi's hands under section 17(2)(iii)? All amounts are in rupees; no rounding is required.

  1. ₹36,000
  2. Nil (correct answer)
  3. ₹4,00,000
  4. ₹18,000

Answer: B — Nil

Working. Monetary salary excluding non-monetary benefits = ₹2,00,000 + ₹40,000 + ₹1,20,000 = ₹3,60,000. Prescribed salary limit under Rule 3C = ₹4,00,000. Aditi is neither a director nor an employee having substantial interest. Her salary does not exceed ₹4,00,000. Therefore, she is not a specified class employee under section 17(2)(iii) for this purpose. Taxable value of personal-servant facility under section 17(2)(iii) = Nil.

Explanation. Under section 17(2)(iii), the specified non-monetary perquisites are taxable in the hands of specified class employees. The updated Rule 3C prescribes a salary limit of ₹4,00,000. Aditi is neither a director nor an employee having substantial interest, and her monetary salary of ₹3,60,000 does not exceed this limit. Consequently, the personal-servant facility is not taxable under this provision. Option (a) wrongly taxes the entire benefit without checking specified-employee status.

Where it goes wrong. Applying an earlier specified-employee salary threshold instead of the ₹4,00,000 limit prescribed by the newly inserted Rule 3C.

Authority. Section 17(2)(iii); Notification No. 133/2025 dated 18.8.2025; Rule 3C; Chapter 3, Unit 1: January 2027 Statutory Update

Question 3 · 2 marks · Chapter 3, Unit 2: Income from House Property · hard

What is the income chargeable under the head Income from house property in respect of Aditi's Indore flat for A.Y. 2026-27? All amounts are in rupees; no rounding is required.

  1. ₹2,35,200
  2. ₹2,03,400
  3. ₹3,69,600
  4. ₹2,49,600 (correct answer)

Answer: D — ₹2,49,600

Working. Step 1: Expected Rent. Higher of municipal value ₹4,80,000 and fair rent ₹5,40,000 = ₹5,40,000. Restricted to standard rent of ₹5,10,000. Expected Rent = ₹5,10,000. Step 2: Actual rent. ₹48,000 × 12 months = ₹5,76,000. Step 3: Gross Annual Value. Higher of expected rent ₹5,10,000 and actual rent ₹5,76,000 = ₹5,76,000. Step 4: Net Annual Value. GAV ₹5,76,000 - Municipal taxes paid by owner ₹48,000 = ₹5,28,000. Step 5: Deductions under section 24. Standard deduction = 30% × ₹5,28,000 = ₹1,58,400. Interest on borrowed capital = ₹1,20,000. Income from house property = ₹5,28,000 - ₹1,58,400 - ₹1,20,000 = ₹2,49,600.

Explanation. For a property let out throughout the year, GAV is the higher of expected rent and actual rent. Expected rent is ₹5,10,000, being the higher of municipal value and fair rent restricted to standard rent. Actual rent of ₹5,76,000 is higher. After deducting municipal taxes, NAV is ₹5,28,000. Section 24 deductions result in income of ₹2,49,600. Option (b) wrongly uses expected rent instead of the higher actual rent.

Where it goes wrong. Using expected rent as GAV even though actual rent is higher, or calculating the 30% deduction on GAV instead of NAV.

Authority. Section 22; Section 23(1); Section 24; Chapter 3, Unit 2: Income from House Property

Question 4 · 2 marks · Chapter 3, Unit 3: Profits and Gains of Business or Profession · easy

Scenario. Mr. Raghav runs a sole-proprietary trading business and follows the mercantile system of accounting. His statement of profit and loss for P.Y. 2025-26 reports net profit of ₹5,00,000 after debiting cash purchases of ₹27,000 paid to one supplier in three instalments of ₹8,000, ₹9,000 and ₹10,000 on the same day. No circumstance under Rule 6DD applies. The account also debits ₹40,000 as book depreciation on a new general plant-and-machinery item costing ₹4,00,000, acquired and first put to business use on 1 December 2025. No other business adjustments arise. Separately, he acquired listed equity shares on 15 July 2025 for ₹2,40,000, inclusive of acquisition charges, and sold them on 15 February 2026 for ₹3,00,000, paying brokerage of ₹2,000 and STT on sale.

What amount of the cash purchase expenditure is disallowed while computing Raghav's business income under section 40A(3)? All amounts are in rupees; no rounding is required.

  1. Nil
  2. ₹17,000
  3. ₹10,000
  4. ₹27,000 (correct answer)

Answer: D — ₹27,000

Working. Cash payment 1 = ₹8,000. Cash payment 2 = ₹9,000. Cash payment 3 = ₹10,000. Aggregate cash payments to the same supplier during the day = ₹8,000 + ₹9,000 + ₹10,000 = ₹27,000. Since aggregate payment exceeds ₹10,000 and no Rule 6DD exception applies, the entire expenditure of ₹27,000 is disallowed under section 40A(3).

Explanation. Section 40A(3) considers the aggregate of payments made to a person in a single day through modes other than the prescribed banking or electronic modes. Raghav paid ₹27,000 in cash to the same supplier on the same day. Since the aggregate exceeds ₹10,000 and no Rule 6DD exception applies, the entire expenditure is disallowed. Option (b) incorrectly disallows only the amount exceeding ₹10,000.

Where it goes wrong. Considering each cash instalment separately or disallowing only the expenditure above the ₹10,000 threshold.

Authority. Section 40A(3); Rule 6DD; Chapter 3, Unit 3: Profits and Gains of Business or Profession

Question 5 · 2 marks · Chapter 3, Unit 3: Profits and Gains of Business or Profession · hard

What is Raghav's taxable income under the head Profits and gains of business or profession after the required adjustments for the cash purchases and depreciation? All amounts are in rupees; no rounding is required.

  1. ₹5,07,000
  2. ₹5,67,000
  3. ₹5,37,000 (correct answer)
  4. ₹5,27,000

Answer: C — ₹5,37,000

Working. Net profit as per statement of profit and loss = ₹5,00,000. Add: Cash purchase expenditure disallowed under section 40A(3) = ₹27,000. Add: Book depreciation disallowed = ₹40,000. Less: Depreciation allowable under section 32. General plant and machinery rate = 15%. Since the asset was put to use for less than 180 days, only 50% of the prescribed depreciation is allowable. Allowable depreciation = ₹4,00,000 × 15% × 50% = ₹30,000. Taxable business income = ₹5,00,000 + ₹27,000 + ₹40,000 - ₹30,000 = ₹5,37,000.

Explanation. The cash purchase expenditure of ₹27,000 is disallowed under section 40A(3), while book depreciation of ₹40,000 must be added back. General plant and machinery attracts depreciation at 15%. Since the machine was put to use for less than 180 days, only 50% of the prescribed depreciation is allowable, amounting to ₹30,000. Option (a) incorrectly allows full depreciation of ₹60,000 instead of restricting it to half.

Where it goes wrong. Allowing full-year depreciation of 15% even though the newly acquired machine was put to use for fewer than 180 days.

Authority. Section 32; Section 40A(3); Chapter 3, Unit 3: Depreciation table for general plant and machinery

Question 6 · 2 marks · Chapter 3, Unit 4: Capital Gains · medium

What is the short-term capital gain arising to Raghav from the transfer of the listed equity shares? All amounts are in rupees; no rounding is required.

  1. ₹58,000 (correct answer)
  2. ₹57,000
  3. ₹60,000
  4. ₹2,98,000

Answer: A — ₹58,000

Working. Date of acquisition = 15 July 2025. Date of transfer = 15 February 2026. Holding period is not more than 12 months; hence, the shares constitute short-term capital assets. Full value of consideration = ₹3,00,000. Less: Brokerage incurred on transfer = ₹2,000. Net sale consideration = ₹2,98,000. Less: Cost of acquisition = ₹2,40,000. Short-term capital gain = ₹2,98,000 - ₹2,40,000 = ₹58,000. STT paid on sale is not deductible while computing capital gains.

Explanation. The shares were held for less than 12 months immediately preceding their transfer and are therefore short-term capital assets. Under section 48, brokerage incurred wholly and exclusively for the transfer is deductible, but STT paid on sale is not deductible. Accordingly, capital gain is ₹3,00,000 less brokerage of ₹2,000 and acquisition cost of ₹2,40,000, giving ₹58,000. Option (b) wrongly deducts STT as well.

Where it goes wrong. Deducting STT paid on transfer as an allowable transfer expense or forgetting to deduct brokerage.

Authority. Section 2(42A); Section 48; Section 111A; Chapter 3, Unit 4: Capital Gains

Question 7 · 2 marks · Chapter 5: Aggregation of Income, Set-off and Carry Forward of Losses · medium

Scenario. Mr. Yash, an individual, has exercised the option to shift out of the default tax regime for A.Y. 2026-27. His current-year loss under the head Income from house property is ₹2,65,000. He also has salary income of ₹6,50,000 and interest income from bank deposits of ₹75,000. He has no other income or losses and furnishes his return within the due date.

What amount of Yash's current-year house-property loss will remain available for carry forward after the permissible inter-head set-off for A.Y. 2026-27? All amounts are in rupees; no rounding is required.

  1. Nil
  2. ₹65,000 (correct answer)
  3. ₹2,00,000
  4. ₹2,65,000

Answer: B — ₹65,000

Working. Current-year loss from house property = ₹2,65,000. Maximum permissible inter-head set-off under the normal provisions = ₹2,00,000. Unabsorbed house-property loss = ₹2,65,000 - ₹2,00,000 = ₹65,000. Amount available for carry forward under section 71B = ₹65,000. Such loss may be carried forward for a maximum of 8 assessment years for set-off against income from house property.

Explanation. Under the normal provisions of the Act, current-year loss from house property can be set off against income under other heads only up to ₹2,00,000 in the same assessment year. Yash's loss is ₹2,65,000, so ₹65,000 remains unabsorbed and can be carried forward under section 71B for set-off against house-property income in subsequent assessment years. Option (c) confuses the permissible inter-head set-off with the remaining carry-forward loss.

Where it goes wrong. Treating the ₹2,00,000 inter-head set-off ceiling as the balance loss to be carried forward.

Authority. Section 71(3A); Section 71B; Chapter 5: Aggregation of Income, Set-off and Carry Forward of Losses

Question 8 · 1 marks · Chapter 9: Income Tax Liability - Computation and Optimisation · easy

Scenario. Ms. Ria, a resident individual aged 28, has total income of ₹11,80,000 for A.Y. 2026-27 under the default tax regime prescribed under section 115BAC. Her income consists entirely of items chargeable at normal slab rates. She has no special-rate income.

What is Ria's income-tax liability after allowing rebate under section 87A but before adding health and education cess? All amounts are in rupees; no rounding is required.

  1. Nil (correct answer)
  2. ₹2,320
  3. ₹58,000
  4. ₹60,000

Answer: A — Nil

Working. Total income = ₹11,80,000. Tax under section 115BAC: Upto ₹4,00,000 = Nil. ₹4,00,000 at 5% = ₹20,000. Remaining ₹3,80,000 at 10% = ₹38,000. Income-tax before rebate = ₹58,000. Rebate under section 87A = Lower of: (a) Income-tax payable = ₹58,000. (c) Prescribed maximum rebate = ₹60,000. Rebate allowable = ₹58,000. Income-tax after rebate and before cess = ₹58,000 - ₹58,000 = Nil.

Explanation. Under section 115BAC, tax on income of ₹11,80,000 is ₹58,000: ₹20,000 on the ₹4,00,000 slab from ₹4,00,000 to ₹8,00,000 and ₹38,000 on the remaining ₹3,80,000 at 10%. Since Ria is a resident individual with total income not exceeding ₹12,00,000, rebate under section 87A equals the lower of ₹58,000 and ₹60,000. The resulting tax liability is Nil. Option (c) ignores the rebate.

Where it goes wrong. Calculating slab tax without reducing the rebate under section 87A, or treating the maximum rebate of ₹60,000 as a fixed rebate.

Authority. Section 115BAC; Section 87A; Chapter 9: Income Tax Liability - Computation and Optimisation

Authorities cited in this paper

Section 10(13A) · Section 16(ia) · Chapter 3, Unit 1: Salaries · Section 17(2)(iii) · Notification No. 133/2025 dated 18.8.2025 · Rule 3C · Chapter 3, Unit 1: January 2027 Statutory Update · Section 22 · Section 23(1) · Section 24 · Chapter 3, Unit 2: Income from House Property · Section 40A(3) · Rule 6DD · Chapter 3, Unit 3: Profits and Gains of Business or Profession · Section 32 · Chapter 3, Unit 3: Depreciation table for general plant and machinery · Section 2(42A) · Section 48 · Section 111A · Chapter 3, Unit 4: Capital Gains · Section 71(3A) · Section 71B · Chapter 5: Aggregation of Income, Set-off and Carry Forward of Losses · Section 115BAC · Section 87A · Chapter 9: Income Tax Liability - Computation and Optimisation

Questions people ask

What is the structure of the paper?

The paper carries 15 marks and 8 questions, arranged in 4 case scenarios. Seven questions are worth 2 marks each and the last one is worth 1 mark. Each scenario sets out the facts, and the questions that follow ask you to apply the Act to them. The time limit is 30 minutes and there is no negative marking, so a wrong answer costs you nothing.

Which chapters are covered?

The test covers Chapter 3, Unit 1: Salaries, Chapter 3, Unit 2: Income from House Property, Chapter 3, Unit 3: Profits and Gains of Business or Profession, Chapter 3, Unit 4: Capital Gains, Chapter 5: Aggregation of Income, Set-off and Carry Forward of Losses, and Chapter 9: Income Tax Liability - Computation and Optimisation. Each scenario draws on one or more of these areas.

What kind of questions are asked?

They are application-based. One scenario deals with a salaried employee who also lets out a flat, and asks for the salary income after the exemption and for the income from the flat. Another deals with a trader, and asks about cash purchases, depreciation on an asset put to use late in the year, and a short-term capital gain on listed shares. The last two scenarios deal with the loss carried forward and with tax on a total income.

Which law and assessment year do the questions use?

The questions apply the Income-tax Act 1961 as amended by Finance Act 2025, notifications and circulars up to 30 June 2026, for assessment year 2026-27, stated as at 31 October 2026. This is a practice test by HeyArtha for CA Intermediate Group 1 students preparing for the January 2027 attempt, and it is not issued by or affiliated with ICAI.

How is the paper marked?

There is no negative marking, so a wrong answer costs you nothing. The paper is marked once at the end of the timed attempt, and you receive a certificate that carries your name and your score. Every question on the result screen carries a Report a mistake button, so you can point out anything that reads wrong or does not agree with the law.

Can I work without a timer and read the explanations?

Yes. Practice mode runs the same paper with no timer, and you can read the explanation for every answer as you go, including the working behind the numerical options. That matters on this paper, since several questions ask for a figure computed step by step and the options differ by one step in the calculation.

Do I need to sign up or pay?

There is no sign-up and no payment, and nothing about a student is stored on a server. You open the paper and answer the questions. The explanations in practice mode also point you to the provision that decides each answer, so you can go back to the chapter and revise that part.

How should I approach the scenarios?

Set out the computation before you look at the options. The questions turn on points such as the salary limit that decides whether a perquisite is taxable, the number of days an asset is put to use, whether a transfer expense is allowable, the ceiling on the set-off of a house-property loss, and the income limit that gives a rebate. Writing the working first keeps the trap options at a distance.

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Other answer keys in this paper

Practice test by HeyArtha. Not issued by or affiliated with ICAI.