Library / Income-tax Act, 2025: The Professional's Master Guide

Appendix C: Practice Questions with Answers

Q1. A company pays Rs. 45,000 as professional fees to a lawyer in one bill. Is TDS required?

Answer: No. The threshold is Rs. 50,000 in the year. If another bill of Rs. 10,000 comes later, the total becomes Rs. 55,000 and TDS at 10% applies on the full Rs. 55,000.

Q2. What is the new section for old section 44AB, and which form replaces Form 3CD?

Answer: Section 63. The audit report is Form 26.

Q3. Salary of Rs. 12,70,000 and no other income, new regime. Tax?

Answer: Nil. After the Rs. 75,000 standard deduction, income is Rs. 11,95,000, below Rs. 12 lakh, so the section 156 rebate covers the tax.

Q4. Total income of Rs. 12,30,000 in the new regime. Tax?

Answer: Normal tax is Rs. 64,500. Income above Rs. 12 lakh is Rs. 30,000, so marginal relief limits tax to Rs. 30,000 plus cess = Rs. 31,200.

Q5. House property loss of Rs. 1,50,000 and salary of Rs. 18 lakh in the new regime. Set off?

Answer: No. In the new regime house property loss cannot be set off against any other head.

Q6. A firm starts business on 1 January 2027. First tax year?

Answer: 1 January 2027 to 31 March 2027 (Tax Year 2026-27).

Q7. Stamp duty value Rs. 88 lakh, sale price Rs. 78 lakh. Which value?

Answer: 88 is 112.8% of 78, above 110%, so Rs. 88 lakh is taken (section 78).

Q8. Friends gift Rs. 49,000 and Rs. 5,000. Taxable amount?

Answer: Rs. 54,000, since the aggregate exceeds Rs. 50,000 (section 92).

Q9. Business loss for Tax Year 2026-27 in a return filed on 15 January 2028. Carry forward?

Answer: No. Section 121 requires the return by the due date.

Q10. Form for TDS on purchase of a flat in October 2026?

Answer: Form 141 (old 26QB); certificate in Form 132.

Q11. LTCG on listed shares Rs. 1,00,000 and STCG Rs. 50,000; other income Rs. 9 lakh (new regime). Tax on gains?

Answer: LTCG is within Rs. 1,25,000, so nil. STCG at 20% = Rs. 10,000 plus cess. No section 156 rebate against it.

Q12. TDS of Rs. 20,000 due in July 2026 deducted in October 2026. Interest?

Answer: 1% a month for 4 months = Rs. 800.

Q13. A company in the normal regime has normal tax of Rs. 2 crore and MAT of Rs. 2.5 crore for Tax Year 2026-27. What does it pay and what credit arises?

Answer: It pays Rs. 2.5 crore. From Tax Year 2026-27, MAT is a final tax, so no new credit arises.

Q14. A closely held company has brought forward losses. 45% of its shares change hands. Can it set off the losses?

Answer: Yes. 55% of voting power is still held by the same persons, which meets the 51% test in section 119.

Q15. Interest of Rs. 2 crore paid to a non-resident parent; EBITDA Rs. 5 crore. Deduction?

Answer: Allowed 30% of EBITDA = Rs. 1.5 crore. Rs. 50 lakh is disallowed and carried forward for 8 years (section 177).

Q16. Cost Rs. 100, price charged to AE Rs. 110. Four comparables give an arithmetic mean price of Rs. 112. Adjustment?

Answer: The difference is Rs. 2, which is 1.8% of Rs. 110, within the 3% tolerance, so no adjustment.

Q17. Royalty to a foreign company: domestic rate 20% plus surcharge and cess, treaty rate 10%. TRC available. Withholding rate?

Answer: 10%, the more beneficial treaty rate, with TRC and Form 41.

Q18. Shares of a demerged company cost Rs. 8 lakh. The transferred undertaking is 25% of net worth. Cost of resulting company shares?

Answer: Rs. 2 lakh; the demerged company shares carry a cost of Rs. 6 lakh.

Q19. An undertaking held for 30 months is sold by slump sale. Nature of gain?

Answer: Short-term, because slump sale requires more than 36 months for long-term. Taxed at normal rates.

Q20. A loss of Tax Year 2019-20 comes to the amalgamated company in a merger effective 1 April 2026. Last year for set off?

Answer: Tax Year 2027-28, eight years after 2019-20.

Q21. Book profit of a firm is Rs. 4,00,000. Maximum partner remuneration?

Answer: Higher of Rs. 3,00,000 or 90% of Rs. 4,00,000 (Rs. 3,60,000) = Rs. 3,60,000.

Q22. A foreign consultant is paid Rs. 5 lakh net of tax; combined rate 20.8%. Gross amount and TDS?

Answer: Gross = 5,00,000 / 0.792 = Rs. 6,31,313; TDS = Rs. 1,31,313.

Q23. Anita works in Ahmedabad. Is her HRA exemption computed at 40% or 50% of salary from Tax Year 2026-27?

Answer: 50%. The Rules, 2026 added Ahmedabad, Bengaluru, Hyderabad and Pune to the 50% list.

Q24. An employee receives gift vouchers worth Rs. 18,000 in the year. Taxable perquisite?

Answer: Rs. 18,000. The exemption applies only if the total is within Rs. 15,000; above that, the whole amount is taxable.

Q25. Gratuity of Rs. 25 lakh to a private sector employee covered by the Gratuity Act, formula amount Rs. 22 lakh. Exempt amount?

Answer: Rs. 20 lakh, the statutory cap, as it is the least of 25, 22 and 20 lakh.

Q26. Interest of Rs. 30 lakh on a loan taken to expand business, for the period before the new unit is put to use. Treatment?

Answer: Capitalise it as part of the cost of the asset (section 32); it is recovered through depreciation.

Q27. A company's employees' PF contribution of March 2027 is deposited on 25 April 2027, after the PF due date of 15 April. Allowed?

Answer: No. Employees' contribution deposited after the due date under the PF law is disallowed permanently (Checkmate Services).

Q28. Book profit Rs. 20.5 crore, normal tax Rs. 2.8 crore (company in normal regime, turnover Rs. 250 crore). Which tax applies?

Answer: MAT at 14% with 12% surcharge and cess is Rs. 3.34 crore, which is higher, so MAT is payable, with no credit from Tax Year 2026-27.

Q29. Eight comparables; the 3rd value is 12% and the 6th is 17%. Taxpayer margin 16%. Adjustment?

Answer: None. 16% lies within the 35th to 65th percentile range of 12% to 17%.

Q30. An NRI sells a flat for Rs. 90 lakh. Can the buyer deduct 1% TDS?

Answer: No. For a non-resident seller, TDS is under section 393(2) at the capital gains rate with surcharge and cess, unless a lower deduction certificate is obtained.

Q31. A US company provides a market research report to an Indian company. Is it FTS under the India-US treaty?

Answer: Generally no, if no technical knowledge or skill is made available. It is business profit, taxable only if there is a PE.

Q32. What is the block period in a search initiated on 10 January 2027?

Answer: Six tax years before the year of search (2020-21 to 2025-26) and 1 April 2026 to the date of the last authorisation.

Q33. What deposit is generally required for a stay of demand pending first appeal?

Answer: 20% of the disputed demand, as per CBDT instructions, with scope for a lower amount in suitable cases.

Q34. A trust applies 80% of its income and does not file an accumulation form. Consequence?

Answer: The shortfall of 5% (to reach 85%) is taxable at 30%.

Q35. A partner retires and receives Rs. 50 lakh; his capital account is Rs. 35 lakh. Who is taxed on Rs. 15 lakh?

Answer: The firm, as capital gains, under the provision corresponding to old section 45(4).

Q36. A resident has only Rs. 1,00,000 of other income and STCG on listed shares of Rs. 4,00,000 (new regime). Tax?

Answer: Unused exemption is Rs. 3,00,000, so taxable STCG is Rs. 1,00,000 at 20% = Rs. 20,000 plus cess.

Q37. A buyer pays a flat price of Rs. 48 lakh; stamp duty value is Rs. 52 lakh. TDS?

Answer: Yes. TDS applies on the higher of consideration and stamp value when the stamp value is Rs. 50 lakh or more: 1% of Rs. 52 lakh = Rs. 52,000.

Q38. A credit co-operative society earns interest from a scheduled bank on surplus funds. Is it deductible under section 149?

Answer: Generally no. Only interest from investments in other co-operative societies is covered; interest from commercial banks has been held taxable.

Q39. A company claims ITC on GST paid on new machinery. What is the cost for depreciation?

Answer: Cost excluding the GST for which ITC is claimed.

Q40. Under Ind AS 116 a lessee books ROU depreciation and interest. What is deductible for tax?

Answer: The lease rent paid; the ROU depreciation and interest are added back.

Q41. Are freebies given by a pharmaceutical company to doctors deductible?

Answer: No (Apex Laboratories, Supreme Court, 2022), since they are prohibited by the medical council regulations.

Q42. Payments by a reverse mortgage bank to a senior citizen: taxable?

Answer: No. They are loan disbursements, and the mortgage is not a transfer.

Q43. A discretionary family trust earns Rs. 10 lakh. Rate?

Answer: Maximum marginal rate, unless an exception applies (for example, trusts created by will for dependants).

Q44. A school trust receives anonymous donations of Rs. 3 lakh out of total donations of Rs. 1 crore. Taxable at 30%?

Answer: No. The limit is the higher of Rs. 1 lakh and 5% of Rs. 1 crore (Rs. 5 lakh). Rs. 3 lakh is within the limit.

Q45. A primary adjustment of Rs. 80 lakh is made. Does a secondary adjustment apply?

Answer: No. Secondary adjustment applies only where the primary adjustment exceeds Rs. 1 crore.

Q46. A company's income under the old regime is lower due to a deduction ending next year. When should it opt for section 200?

Answer: From the year the deduction ends, if a multi-year model shows section 200 is cheaper thereafter; the option is irreversible.

Q47. Profit of a Singapore business controlled from Singapore is received in India by an NRI. Taxable?

Answer: Yes. Income received in India is taxable for every person regardless of residence.

Q48. Foreign income of earlier years brought into India by a resident. Taxable?

Answer: No. Remittance of income already earned and taxed or not taxable earlier is not fresh income.

Q49. RSUs of a US parent vest when the price is USD 100, rate 85, for 100 units. Perquisite?

Answer: Rs. 8,50,000, subject to TDS by the Indian employer.

Q50. Debt fund units bought in 2024 are sold after 3 years. Long-term?

Answer: No. Specified debt funds bought on or after 1 April 2023 are always short-term, taxed at slab rates.

Q51. A firm pays interest to partners at 18% on capital. Allowed?

Answer: Only up to 12% simple; the excess is disallowed in the firm and not taxed in the partners' hands.

Q52. Can an F&O loss be set off against salary?

Answer: No. Business loss cannot be set off against salary; it can be set off against other heads (except salary) and carried forward for 8 years.

Q53. Is switching from the regular plan to the direct plan of the same mutual fund scheme a transfer?

Answer: Yes. It is treated as redemption of the regular plan units and purchase of direct plan units, so capital gains arise.

Q54. An investor pays annual life insurance premium of Rs. 6 lakh on a non-ULIP policy issued in 2024. Is the maturity amount exempt?

Answer: No. As the aggregate premium exceeds Rs. 5 lakh, the excess of maturity proceeds over premiums is taxable as income from other sources.

Q55. Which Act governs a scrutiny notice issued in 2026 for FY 2023-24?

Answer: The 1961 Act, as saved by section 536.

Q56. Where are the exemptions of old section 10 found in the 2025 Act?

Answer: In Schedules II to VII read with section 11.

Q57. What is the TDS payment code series used for section 393 entries?

Answer: Payment codes in the 1001 to 1067 range, one for each nature of payment.

Q58. A return is filed on 31 July but not e-verified until 15 September. Status?

Answer: It is treated as filed on the date of verification (and may be belated), since verification was beyond 30 days.

Q59. What is POEM and when does it matter?

Answer: Place of effective management; a foreign company with POEM in India is resident and taxed on global income.

Q60. Can an HUF claim the section 156 rebate?

Answer: No. The rebate is only for resident individuals.

Q61. Which form replaces Form 12BB for employee declarations?

Answer: Form 124.

Q62. A company's Form 26 shows a disallowance under section 37 that is not added in the return. What can CPC do?

Answer: Make the adjustment during processing under section 270 after an intimation.

Q63. What is the maximum exemption under section 82?

Answer: Rs. 10 crore.

Q64. Name two differences between GAAR and the treaty PPT.

Answer: GAAR needs a tax benefit above Rs. 3 crore and Approving Panel approval and applies where the main purpose is tax; the PPT applies if one of the principal purposes is a treaty benefit, with no monetary threshold.

Q65. What happens if new house property bought for section 82 is sold within 3 years?

Answer: The exemption is withdrawn by reducing the cost of the new house by the exempted gain, increasing the gain on its sale.

Q66. Is interest on income tax refund taxable?

Answer: Yes, as income from other sources in the year of receipt.

Q67. What is the time limit for filing Form 26 (tax audit)?

Answer: One month before the return due date, generally 30 September.

Q68. Can a foreign company with a PE in India use the section 200 rate?

Answer: No. Section 200 is for domestic companies only; foreign companies are taxed at 35% plus surcharge and cess.

Q69. What does a SWP withdrawal of Rs. 60,000 with a cost component of Rs. 40,000 give?

Answer: A capital gain of Rs. 20,000; only the gain part is taxed.

Q70. What rate applies to undisclosed income determined in a block assessment?

Answer: 60% plus surcharge and cess.

Q71. A demand of Rs. 5 lakh is disputed in appeal. How much is usually required for stay?

Answer: About 20%, that is Rs. 1 lakh, subject to the officer's discretion.

Q72. What is the refund interest rate?

Answer: 0.5% a month, if the refund is at least 10% of the tax determined.

Q73. What is the depreciation rate on computers and software?

Answer: 40%.

Q74. A car used 60% for business costs Rs. 10 lakh. Depreciation in a full year?

Answer: 15% of Rs. 10 lakh = Rs. 1,50,000, of which 60% (Rs. 90,000) is allowed.

Q75. What is the CII for 2001-02 and why does it matter?

Answer: 100. It is the base year; assets acquired before 1 April 2001 can use FMV on that date as cost.

Q76. Can indexation be used for gold jewellery sold in 2026?

Answer: No. The indexation option is only for land and building of resident individuals and HUFs acquired before 23 July 2024.

Q77. A short-term capital loss and slab rate STCG exist together. Where should the loss be set off?

Answer: Against the gains taxed at the highest rate, usually slab rate STCG, since the taxpayer can choose the order in the return.

Q78. Is a returning NRI's foreign rental income taxable in the RNOR years?

Answer: No, if it is foreign income not received in India and not from a business controlled in India.

Q79. On a total partition of an HUF, are capital gains taxable?

Answer: No. Distribution of assets on total partition is not a transfer.

Q80. Which appendix gives the list of sections by subject matter?

Answer: Appendix J.

Q81. A company pays TDS it failed to deduct before the return due date. Is the expense disallowed?

Answer: No. The section 35 disallowance applies only if TDS is not paid by the return due date.

Q82. What rate of interest applies for failure to deduct TDS?

Answer: 1% a month from the date it was deductible to the date of deduction.

Q83. A seafarer on a foreign ship is non-resident. Is his salary credited to his NRE account taxable?

Answer: No, as clarified for non-resident seafarers for services outside India.

Q84. How is a small trader's cash receipt percentage relevant to section 58?

Answer: If cash receipts are 5% or less, the turnover limit rises from Rs. 2 crore to Rs. 3 crore.

Q85. Which ITR form can a small trader use if he also has LTCG of Rs. 60,000 on equity funds?

Answer: ITR-4, since it now allows section 198 LTCG up to Rs. 1,25,000.

Q86. A senior citizen with nil tax did not give Form 121. What happens to TDS?

Answer: The bank deducts TDS, which can be recovered only by filing a return and claiming a refund.

Q87. Is interest on a savings bank account deductible under the new regime?

Answer: No. Section 153 deductions are available only in the old regime.

Q88. What is the minimum stay test for an Indian citizen leaving India for employment?

Answer: 182 days in the tax year; the 60-day alternative does not apply.

Q89. What is a "specified domestic transaction" threshold?

Answer: Rs. 20 crore of aggregate transactions in the year.

Q90. What is the time limit to invest in section 85 bonds?

Answer: Within 6 months from the date of transfer.

Q91. Can a company that opted for section 200 go back to the normal regime?

Answer: No. The option once exercised cannot be withdrawn.

Q92. Who files the return of a person who died during the year?

Answer: The legal heir, as representative, after registering on the portal.