CA Inter Taxation - Income-tax Law MCQ Test 6: answer key

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

Scenario. Ms. Riya Malhotra is employed as a senior finance executive with Zenith Industries Ltd., a company having its registered office in Mumbai. She is neither a director nor a shareholder having substantial interest in the company. During the previous year 2025-26, she received basic salary of Rs. 60,000 per month and house rent allowance of Rs. 30,000 per month. She occupied a rented apartment in Mumbai throughout the year and paid rent of Rs. 32,000 per month. She exercised the option to shift out of the default tax regime and pay tax under the normal provisions of the Act. Her employer also paid professional tax of Rs. 2,400 on her behalf, which she subsequently reimbursed to the employer during the year. For the purpose of determining her salary income, assume that she actually bears this professional tax expenditure. She has no entertainment allowance. During December 2025, her employer arranged medical treatment for her father, who is wholly dependent on her, at a hospital outside India. The employer incurred Rs. 3,20,000 towards medical treatment and accommodation abroad, within the expenditure permitted by the RBI. Additionally, Rs. 1,10,000 was incurred towards international air travel for Riya and her father. Her gross total income, computed before including the expenditure on such travel, after considering all other income and permissible deductions, amounts to Rs. 7,95,000. Her salary chargeable under the head Salaries, excluding the value of non-monetary benefits and amenities, exceeds Rs. 4,00,000. The employer has also provided her with a furnished accommodation facility for a short period during an official assignment, for which the applicable valuation rules are to be considered separately. Riya seeks advice on the exemption available for HRA, the tax treatment of overseas medical expenditure and the deductions permissible from her salary income under section 16.

What is the amount of HRA exemption available to Riya for P.Y. 2025-26 under the normal provisions of the Act?

1. Rs. 2,88,000, because the exemption under Rule 2A is restricted to actual rent paid less 10% of salary for the relevant period.
2. Rs. 3,12,000, because the least of the three prescribed amounts under Rule 2A is allowable. (correct answer)
3. Rs. 3,60,000, because the exemption cannot exceed the actual HRA received.
4. Rs. 2,40,000, because 40% of salary is the applicable limit for all employees.

Answer: B — Rs. 3,12,000, because the least of the three prescribed amounts under Rule 2A is allowable.

Working. Annual basic salary = 60,000 x 12 = Rs. 7,20,000. Annual HRA = 30,000 x 12 = Rs. 3,60,000. Annual rent = 32,000 x 12 = Rs. 3,84,000. (i) Actual HRA = Rs. 3,60,000. (ii) Rent minus 10% of salary = 3,84,000 - 72,000 = Rs. 3,12,000. (iii) 50% of salary = Rs. 3,60,000. Exemption = Rs. 3,12,000.

Explanation. Riya is employed in Mumbai, a metropolitan city for HRA purposes. The three limits are actual HRA of Rs. 3,60,000, rent paid less 10% of salary of Rs. 3,12,000 and 50% of salary of Rs. 3,60,000. The least amount, Rs. 3,12,000, is exempt. Option (a) incorrectly uses a different rent calculation, while option (c) ignores the other statutory limits.

Where it goes wrong. Confusing the actual HRA received with the least-of-three calculation and applying the non-metropolitan percentage.

Authority. Section 10(13A); Rule 2A

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

Considering Notification No. 133/2025 dated 18.08.2025, which statement correctly describes the tax treatment of the specified employee classification and the overseas travel expenditure?

1. Riya is not a specified employee because she is neither a director nor a shareholder having substantial interest; consequently, the medical and travel expenditure is outside the perquisite provisions.
2. Riya is a specified employee because her salary excluding non-monetary benefits exceeds Rs. 4,00,000; however, the travel expenditure is taxable because the medical treatment took place outside India.
3. Riya is a specified employee because her salary excluding non-monetary benefits exceeds Rs. 4,00,000, and the travel expenditure is exempt because her gross total income before including it does not exceed Rs. 8,00,000. (correct answer)
4. Riya is a specified employee only if her salary exceeds Rs. 8,00,000, and the travel expenditure is exempt irrespective of her gross total income.

Answer: C — Riya is a specified employee because her salary excluding non-monetary benefits exceeds Rs. 4,00,000, and the travel expenditure is exempt because her gross total income before including it does not exceed Rs. 8,00,000.

Working. Specified employee threshold = Rs. 4,00,000. Riya's salary excluding non-monetary benefits exceeds this threshold. Gross total income before including overseas travel expenditure = Rs. 7,95,000, which does not exceed Rs. 8,00,000. Accordingly, the qualifying travel expenditure is not treated as a taxable perquisite. Medical treatment and stay abroad remain subject to the RBI-permitted expenditure condition.

Explanation. New Rule 3C prescribes Rs. 4,00,000 as the salary threshold for determining the specified class of employees under section 17(2)(iii). Riya crosses this threshold. Under Rule 3D, overseas travel expenditure is exempt where gross total income before including that expenditure does not exceed Rs. 8,00,000. Her income is Rs. 7,95,000. Option (b) wrongly treats overseas medical treatment itself as disqualifying the travel exemption.

Where it goes wrong. Interchanging the Rs. 4 lakh specified-employee salary threshold with the Rs. 8 lakh gross-total-income condition for overseas travel.

Authority. Section 17(2)(iii); Notification No. 133/2025 dated 18.08.2025; Rule 3C; Rule 3D

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

What is the aggregate deduction allowable to Riya under section 16 while computing income chargeable under the head Salaries?

1. Rs. 50,000, because professional tax is not deductible under the normal provisions of the Act.
2. Rs. 52,400, because the standard deduction and professional tax actually borne by her are both allowable. (correct answer)
3. Rs. 75,000, because the standard deduction applicable under the default tax regime is available irrespective of the regime selected.
4. Rs. 77,400, because the standard deduction of Rs. 75,000 and professional tax of Rs. 2,400 are both deductible.

Answer: B — Rs. 52,400, because the standard deduction and professional tax actually borne by her are both allowable.

Working. Standard deduction under normal provisions = Rs. 50,000. Professional tax actually borne and paid = Rs. 2,400. Aggregate deduction under section 16 = 50,000 + 2,400 = Rs. 52,400.

Explanation. Under the normal provisions, the standard deduction under section 16(ia) is Rs. 50,000. Professional tax actually paid by the employee is also deductible under section 16(iii). Riya bears Rs. 2,400 as professional tax. Hence, the aggregate deduction is Rs. 52,400. Options (c) and (d) incorrectly apply the standard deduction available under the default tax regime.

Where it goes wrong. Applying the default-regime standard deduction while computing salary income under the optional tax regime.

Authority. Section 16(ia); Section 16(iii)

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

Scenario. Mr. Arjun Deshmukh, a resident individual, purchased a vacant urban plot of land in Pune on 10th April, 2023 for Rs. 20,00,000. He subsequently incurred no capital expenditure on improvement of the plot. After receiving an offer from a property developer, he entered into an agreement for its sale on 10th January, 2025 for a consideration of Rs. 90,00,000. On the date of agreement, the stamp duty value of the plot was Rs. 96,00,000. Arjun received Rs. 10,00,000 through RTGS on that date, with the balance payable upon execution of the registered conveyance deed. The conveyance deed was registered on 15th May, 2025, when the stamp duty value had increased to Rs. 1,02,00,000. The sale was completed for the originally agreed consideration of Rs. 90,00,000. Arjun incurred brokerage expenditure of Rs. 1,00,000 wholly and exclusively in connection with the transfer. Following the sale, Arjun subscribed to eligible bonds issued by the National Highways Authority of India for Rs. 30,00,000 on 30th October, 2025 and another Rs. 25,00,000 on 10th November, 2025. Both investments were made through banking channels. He did not acquire any other capital asset during the year. Arjun is particularly concerned about the difference between the stamp duty values on the agreement and registration dates, the applicability of the special provisions governing transfer of immovable property and the maximum exemption available against his capital gains. He also wants to understand the applicable tax-rate framework because the original plot was acquired before 23rd July, 2024. Assume that the plot is his only capital asset transferred during the previous year and that no other exemption is claimed.

Which statement correctly describes the nature of the capital asset and the applicable tax-rate framework for Arjun's transfer?

1. The plot is a short-term capital asset because the transfer deed was registered within 24 months of the date of the sale agreement, and the gains are taxable at normal rates.
2. The plot is a long-term capital asset, and the entire gain is necessarily taxable at 20% after indexation because it was acquired before 23rd July, 2024.
3. The plot is a long-term capital asset, and Arjun must pay tax at 12.5% without indexation because indexation is unavailable for every transfer made during P.Y. 2025-26.
4. The plot is a long-term capital asset because it was held for more than 24 months, and Arjun, being a resident individual, may compare 12.5% without indexation with 20% with indexation and adopt the more beneficial tax treatment. (correct answer)

Answer: D — The plot is a long-term capital asset because it was held for more than 24 months, and Arjun, being a resident individual, may compare 12.5% without indexation with 20% with indexation and adopt the more beneficial tax treatment.

Working. Acquisition date = 10.04.2023. Transfer date = 15.05.2025. Period of holding exceeds 24 months. Therefore, the plot is a long-term capital asset. Since Arjun is a resident individual and acquired the land before 23.07.2024, the two tax computations under section 112 must be compared: 12.5% without indexation and 20% with indexation.

Explanation. Land is a long-term capital asset when held for more than 24 months. Arjun acquired the plot on 10th April, 2023 and transferred it on 15th May, 2025. Since the land was acquired before 23rd July, 2024 and Arjun is a resident individual, the special transitional protection permits comparison between 12.5% without indexation and 20% with indexation. Option (b) wrongly makes the indexed option compulsory.

Where it goes wrong. Confusing the 24-month holding period with the date-based transitional tax treatment for land and buildings acquired before 23rd July, 2024.

Authority. Section 2(42A); Section 112

Question 5 · 2 marks · Chapter 3, Unit 4: Capital Gains · hard

Determine the full value of consideration to be adopted for computing Arjun's capital gains under section 50C.

1. Rs. 1,02,00,000, because the stamp duty value on the registration date must always be adopted.
2. Rs. 96,00,000, because the stamp duty value on the agreement date is applicable whenever part consideration is received through RTGS or electronic clearing system on or before the agreement date.
3. Rs. 90,00,000, because the agreement-date stamp duty value is below 110% of the actual consideration and the prescribed payment condition is satisfied. (correct answer)
4. Rs. 1,00,00,000, because section 50C requires adoption of 110% of the actual sale consideration whenever stamp duty value exceeds the consideration.

Answer: C — Rs. 90,00,000, because the agreement-date stamp duty value is below 110% of the actual consideration and the prescribed payment condition is satisfied.

Working. Actual consideration = Rs. 90,00,000. Agreement-date stamp duty value = Rs. 96,00,000. 110% of actual consideration = Rs. 99,00,000. Since Rs. 96,00,000 does not exceed Rs. 99,00,000, section 50C does not substitute the stamp duty value. Full value of consideration = Rs. 90,00,000. The RTGS payment on the agreement date permits consideration of the agreement-date stamp duty value instead of the registration-date value.

Explanation. Since part consideration was received through RTGS on the agreement date, the agreement-date stamp duty value may be considered. However, Rs. 96,00,000 does not exceed 110% of Rs. 90,00,000, namely Rs. 99,00,000. Therefore, the actual consideration of Rs. 90,00,000 is adopted. Option (b) incorrectly assumes that satisfying the payment condition automatically makes the stamp duty value the deemed consideration.

Where it goes wrong. Assuming that satisfying the agreement-date payment condition automatically results in adoption of the agreement-date stamp duty value.

Authority. Section 50C

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

What is the maximum exemption available to Arjun under section 54EC against the long-term capital gain arising from the transfer of the plot?

1. Rs. 50,00,000, because the investment qualifies within six months but the statutory investment ceiling restricts the exemption. (correct answer)
2. Rs. 55,00,000, because the entire investment in eligible bonds made within six months is deductible.
3. Rs. 69,00,000, because the entire capital gain is considered exempt once qualifying investments in eligible specified bonds are made within six months of transfer.
4. Rs. 30,00,000, because only the first investment made in eligible bonds can be considered for exemption.

Answer: A — Rs. 50,00,000, because the investment qualifies within six months but the statutory investment ceiling restricts the exemption.

Working. Full value of consideration under section 50C = Rs. 90,00,000. Less: brokerage = Rs. 1,00,000. Net consideration = Rs. 89,00,000. Less: cost of acquisition = Rs. 20,00,000. Long-term capital gain = Rs. 69,00,000. Eligible bond investments = Rs. 30,00,000 + Rs. 25,00,000 = Rs. 55,00,000. Both investments are within six months of 15.05.2025. Maximum eligible investment = Rs. 50,00,000. Exemption = lower of Rs. 69,00,000 and Rs. 50,00,000 = Rs. 50,00,000.

Explanation. Both investments were made within six months from the date of transfer and qualify for consideration under section 54EC. However, the maximum eligible investment for this purpose is restricted to Rs. 50,00,000. The capital gain is Rs. 69,00,000, which exceeds this ceiling. Hence, the exemption is Rs. 50,00,000. Option (b) ignores the statutory ceiling.

Where it goes wrong. Confusing the actual investment amount with the statutory ceiling applicable to eligible bonds.

Authority. Section 48; Section 54EC

Question 7 · 2 marks · Chapter 4: Income of Other Persons Included in Assessee's Total Income · medium

Scenario. Mr. Dev Sharma and his wife, Mrs. Neha Sharma, have a minor daughter, Ananya, aged 15 years. During P.Y. 2025-26, Dev gifted Rs. 5,00,000 to Ananya, which she invested in a fixed deposit and earned interest of Rs. 30,000. Separately, Ananya earned Rs. 45,000 by performing Hindustani classical music at various public programmes. Her performances involved the application of her personal musical skill and talent. Dev's total income before including any income of Ananya was Rs. 13,40,000, whereas Neha's corresponding total income was Rs. 9,20,000. Both parents exercised the option to shift out of the default tax regime. Their marriage subsists throughout the previous year.

What amount of Ananya's income is includible in Dev's total income after considering the applicable clubbing provisions and exemption?

1. Rs. 28,500, because fixed deposit interest is clubbed in the hands of the parent having higher income, after allowing the exemption under section 10(32). (correct answer)
2. Rs. 30,000, because only fixed deposit interest is clubbed and no exemption is available for minor children's income under the optional tax regime.
3. Rs. 75,000, because both fixed deposit interest and income from musical performances are clubbed without exception.
4. Rs. 45,000, because income earned through the application of personal skill is clubbed, whereas fixed deposit interest is independently taxable in the minor's hands.

Answer: A — Rs. 28,500, because fixed deposit interest is clubbed in the hands of the parent having higher income, after allowing the exemption under section 10(32).

Working. Fixed deposit interest = Rs. 30,000. Income from musical performances = Rs. 45,000. Income arising from application of personal skill or talent is excluded from clubbing. Dev has the higher pre-clubbing income of Rs. 13,40,000. Therefore, interest of Rs. 30,000 is included in Dev's income under section 64(1A). Less: exemption under section 10(32) = Rs. 1,500. Net amount includible = Rs. 28,500.

Explanation. Interest on the fixed deposit arising from funds gifted by Dev is includible under section 64(1A). Dev has the higher total income before clubbing. However, income earned by a minor through the application of personal skill or talent is excluded from clubbing. Thus, the musical performance income is not clubbed. Since the parents exercise the optional tax regime, section 10(32) permits an exemption of Rs. 1,500, reducing the amount included to Rs. 28,500.

Where it goes wrong. Clubbed income of a minor child is confused with income independently earned through the application of personal skill or talent, and the exemption under section 10(32) is overlooked.

Authority. Section 64(1A); Section 10(32)

Question 8 · 1 marks · Chapter 8: Provisions for Filing Return of Income · hard

Scenario. Mr. Kabir Mehta is an individual whose residential status for P.Y. 2025-26 is Resident but Not Ordinarily Resident (RNOR). His total income is Rs. 2,20,000, and he has no other income or transactions attracting compulsory filing provisions. During the year, he held a beneficial ownership interest in a bank account located outside India. He has not incurred expenditure on foreign travel, electricity consumption or other specified transactions attracting compulsory filing.

Is Kabir compulsorily required to furnish a return of income solely because he holds beneficial ownership in a bank account located outside India?

1. Yes, because every resident individual holding a foreign asset must file a return irrespective of residential classification.
2. Yes, because ownership of a foreign bank account automatically overrides the basic exemption limit.
3. No, because foreign assets are never relevant for compulsory filing of returns where total income is below the basic exemption limit.
4. No, because the foreign-asset filing requirement under section 139(1) applies to a resident other than a not ordinarily resident, and Kabir is an RNOR. (correct answer)

Answer: D — No, because the foreign-asset filing requirement under section 139(1) applies to a resident other than a not ordinarily resident, and Kabir is an RNOR.

Working. Kabir's residential status = RNOR. The foreign-asset compulsory filing condition under section 139(1) applies to a resident other than an RNOR. Kabir is therefore outside this particular condition. His total income is below the applicable basic exemption limit and no other compulsory filing trigger is present. Hence, no compulsory return filing arises solely from the foreign bank account.

Explanation. Section 139(1) requires a resident other than a not ordinarily resident to file a return where the specified foreign-asset or foreign-account conditions are satisfied, irrespective of the income threshold. Kabir is RNOR, which excludes him from this particular requirement. Since no other compulsory filing condition applies, the foreign account alone does not make filing mandatory. Option (c) states an excessively broad exemption.

Where it goes wrong. Ignoring the specific exclusion of a Resident but Not Ordinarily Resident from the foreign-asset compulsory filing condition.

Authority. Section 139(1)