41. Booking a fee with TDS deducted
The company books a professional fee of ₹50,000 from a consultant and pays it, deducting TDS at 10% (assume this rate applies and no GST). What is the correct combined entry?
- A.Debit Professional fees ₹45,000, credit Bank ₹45,000
- B.Debit Professional fees ₹50,000, credit Bank ₹50,000, and book TDS only when deposited
- C.Debit Professional fees ₹50,000; credit Bank ₹45,000 and TDS payable ₹5,000
- D.Debit Professional fees ₹50,000 and TDS receivable ₹5,000; credit Bank ₹55,000
Show answer
Answer: C. Debit Professional fees ₹50,000; credit Bank ₹45,000 and TDS payable ₹5,000
The full fee of ₹50,000 is the expense. The payer withholds ₹5,000 as TDS, which is a liability to the government until it is deposited, and pays the net ₹45,000. When the TDS is deposited, TDS payable is debited and Bank credited.
42. UAE corporate tax on taxable income
A UAE mainland company (not a qualifying free zone person, not part of a large multinational group) has taxable income of AED 1,375,000. Under the UAE Corporate Tax law, what is the tax?
- A.AED 123,750
- B.AED 90,000
- C.AED 33,750
- D.AED 68,750
Show answer
Answer: B. AED 90,000
UAE Corporate Tax charges 0% on taxable income up to AED 375,000 and 9% above it. The taxable slice is 1,375,000 − 375,000 = AED 1,000,000, so tax is 9% × 1,000,000 = AED 90,000.
43. What GAAR is aimed at
Which arrangement is the General Anti-Avoidance Rule (GAAR) in Indian income tax mainly aimed at?
- A.An arrangement whose main purpose is to obtain a tax benefit and that lacks commercial substance or misuses the law
- B.Any investment that gives a tax deduction, such as a pension contribution
- C.All transactions with related parties
- D.Choosing the new tax regime over the old one
Show answer
Answer: A. An arrangement whose main purpose is to obtain a tax benefit and that lacks commercial substance or misuses the law
GAAR targets impermissible avoidance arrangements: those whose main purpose is a tax benefit and which also, for example, lack commercial substance, are not at arm’s length or misuse the law. The tax authority can then deny the benefit, for example by ignoring a step or recharacterising the transaction. Normal use of deductions and regimes is not targeted.
44. Tax on long-term gains from listed shares
An individual sells listed equity shares held for 2 years, on which STT was paid, and makes a long-term capital gain of ₹3,25,000. As of 2025, such gains above ₹1,25,000 a year are taxed at 12.5% under Section 112A. Ignoring surcharge and cess, what is the tax?
- A.₹40,625
- B.₹25,000
- C.₹32,500
- D.₹20,000
Show answer
Answer: B. ₹25,000
Under Section 112A, the first ₹1,25,000 of such long-term gains in a year is exempt. Taxable gain = ₹3,25,000 − ₹1,25,000 = ₹2,00,000, and tax = 12.5% × ₹2,00,000 = ₹25,000. Applying 12.5% to the full gain would wrongly give ₹40,625.
45. Cash gifts from two friends
During the year, an individual receives cash gifts of ₹30,000 and ₹40,000 from two friends, who are not relatives. Under Section 56(2)(x), how much is taxable?
- A.₹20,000
- B.₹70,000
- C.₹0
- D.₹40,000
Show answer
Answer: B. ₹70,000
Sums of money received without consideration from non-relatives are taxable if their aggregate value in the year exceeds ₹50,000. The test uses the total, ₹70,000, and once it is crossed the entire ₹70,000 is taxable, not just the excess over ₹50,000. Gifts from relatives or on marriage are excluded.
46. The concessional company tax regime
A domestic company opts for the concessional tax regime under Section 115BAA. Which statement is correct?
- A.Minimum Alternate Tax (MAT) does not apply to it, but it cannot claim specified deductions and incentives
- B.It can claim all deductions and pay MAT at a lower rate
- C.It pays tax at the normal rate but avoids TDS
- D.It can switch back and forth every year freely
Show answer
Answer: A. Minimum Alternate Tax (MAT) does not apply to it, but it cannot claim specified deductions and incentives
Section 115BAA offers a lower base rate to domestic companies that give up specified exemptions and incentives, such as certain additional depreciation and area-based deductions. Companies under this regime are not subject to MAT. Once opted, the choice cannot be withdrawn for later years.
47. Late payments to MSE suppliers
A company buys from a supplier registered as a micro enterprise and pays it well after the time allowed under the MSMED Act. How does Section 43B(h) affect the company’s income tax?
- A.No effect; the expense is allowed when booked
- B.The expense is allowed only in the year it is actually paid
- C.The expense is permanently disallowed
- D.The supplier’s income becomes exempt
Show answer
Answer: B. The expense is allowed only in the year it is actually paid
Section 43B(h) allows a deduction for amounts owed to micro and small enterprises only in the year of actual payment if payment is not made within the time limit under the MSMED Act. If paid within time, the deduction follows the normal accrual basis. Advisers should check supplier MSME status and payables ageing at year end.
48. Setting off capital losses
In a year, an individual has short-term capital gain of ₹1,00,000, long-term capital gain of ₹2,00,000, long-term capital loss of ₹50,000 and short-term capital loss of ₹1,20,000. After allowed set-offs, what are the net taxable capital gains?
- A.₹1,30,000
- B.₹1,80,000
- C.₹2,30,000
- D.₹1,50,000
Show answer
Answer: A. ₹1,30,000
A long-term loss can be set off only against long-term gains, while a short-term loss can be set off against either. Set off ₹1,00,000 of the short-term loss against short-term gains and the remaining ₹20,000 against long-term gains, then the ₹50,000 long-term loss against long-term gains. Net long-term gain = ₹2,00,000 − ₹20,000 − ₹50,000 = ₹1,30,000, and short-term gain is nil.
49. Treaty tie-breaker for dual residents
An individual is resident in both India and the UAE under their domestic laws. Under the treaty tie-breaker rules, which test is generally applied first?
- A.Nationality
- B.Habitual abode
- C.Mutual agreement between the tax authorities
- D.Where he has a permanent home available
Show answer
Answer: D. Where he has a permanent home available
Treaty tie-breaker rules usually apply tests in order: permanent home, then centre of vital interests (personal and economic ties), then habitual abode, then nationality, and finally mutual agreement. The first test that gives a clear answer decides treaty residence.
50. House property loss against salary
Under the old regime, an individual has salary income of ₹12,00,000 and a loss from a let-out house property of ₹3,50,000, mainly due to loan interest. How much of the loss can be set off against salary this year?
- A.₹3,50,000
- B.₹1,50,000
- C.₹0
- D.₹2,00,000
Show answer
Answer: D. ₹2,00,000
A loss under the head house property can be set off against other heads only up to ₹2,00,000 in a year. The remaining ₹1,50,000 is carried forward for up to eight years, to be set off only against house property income. Under the new regime, such a loss cannot be set off against other heads at all.
51. Old flat sold after July 2024
A resident individual sells a flat bought in 2012 in FY 2025-26. How can the long-term gain be taxed?
- A.Lower of 12.5% plain or 20% indexed
- B.Only at 12.5%, with no indexation at all
- C.Only at 20%, with indexation
- D.At slab rates, as indexation was removed
Show answer
Answer: A. Lower of 12.5% plain or 20% indexed
From 23 July 2024 the LTCG rate became 12.5% without indexation. For land or buildings acquired before that date, resident individuals and HUFs may compute tax both ways and pay the lower of 12.5% without indexation and 20% with indexation.
52. Tax on a share buyback
A listed company buys back shares from a resident in FY 2025-26 for ₹5 lakh. The shares cost ₹3 lakh. How is this taxed in the shareholder's hands?
- A.₹2 lakh as capital gain at 12.5%
- B.Nil; the company pays buyback tax
- C.₹5 lakh as capital gain at 20%
- D.₹5 lakh dividend, ₹3 lakh capital loss
Show answer
Answer: D. ₹5 lakh dividend, ₹3 lakh capital loss
From 1 October 2024, buyback proceeds are deemed dividend and taxed at the shareholder's slab rate, with TDS. The cost of the shares bought back is treated as a capital loss, which can be set off against capital gains.
53. Loss from intraday trading
For FY 2025-26 (Income-tax Act, 1961 numbering), a trader has a ₹4 lakh loss from intraday equity trades and a ₹6 lakh profit from regular business. How is the loss treated?
- A.Set off against the ₹6 lakh business profit
- B.Only against speculative income, for 4 years
- C.Set off against salary up to ₹2 lakh
- D.Carried forward for 8 years against any income
Show answer
Answer: B. Only against speculative income, for 4 years
Intraday equity trading is speculative under Section 43(5). Speculative losses can be set off only against speculative income and carried forward for four years. Non-speculative business losses get eight years.
54. What an RNOR is taxed on
An individual is "resident but not ordinarily resident" (RNOR) this year. Which income is taxable in India?
- A.Indian income plus India-controlled foreign business
- B.Global income, the same as any other resident
- C.Only income that is actually received in India
- D.Only Indian salary income and nothing else
Show answer
Answer: A. Indian income plus India-controlled foreign business
An RNOR is taxed on income received or arising in India and on foreign income from a business controlled or profession set up in India. Other foreign income, such as rent from a Dubai flat, is not taxed. A resident and ordinarily resident is taxed on global income.
55. Visiting NRI with 130 days in India
An Indian citizen living abroad visits India for 130 days this year, and spent 400 days in India over the previous four years. His Indian income is ₹20 lakh. What is his status?
- A.Non-resident, as he stayed under 182 days
- B.Resident and ordinarily resident
- C.Non-resident, as visitors are always excluded
- D.Resident (RNOR) under the 120-day rule
Show answer
Answer: D. Resident (RNOR) under the 120-day rule
For a visiting citizen, the 60-day test is replaced by 182 days, but by 120 days when Indian income exceeds ₹15 lakh. With 130 days this year and 365+ days in the four prior years, he is resident, and the law makes such a person RNOR.
56. Buying a flat from an NRI
For FY 2025-26 (Income-tax Act, 1961 numbering), a resident buys a flat from a non-resident seller, who has a long-term capital gain. What must the buyer do about TDS?
- A.Deduct under Section 195, using a TAN
- B.Deduct 1% under 194-IA using Form 26QB
- C.No TDS, as the seller pays tax abroad
- D.Deduct 30% of the full sale price
Show answer
Answer: A. Deduct under Section 195, using a TAN
Section 194-IA covers only resident sellers. For a non-resident, the buyer deducts under Section 195 at the rate for the income, such as 12.5% plus surcharge and cess on long-term gains, and needs a TAN to file Form 27Q. The seller can apply for a lower deduction certificate.
57. Switching regimes with business income
A shop owner with business income opted out of the new regime. Next year he wants to return to it. What does Section 115BAC allow (Income-tax Act, 1961, FY 2025-26)?
- A.He can switch freely every year, like salaried people
- B.He can return only once; after that, never opt out again
- C.He can never return once he has opted out
- D.He can switch only with the officer's permission
Show answer
Answer: B. He can return only once; after that, never opt out again
Taxpayers with business or professional income must file Form 10-IEA to opt out of the new regime, and can come back to it only once. After returning, they cannot opt out again while they have such income. Those without business income choose each year in the return.
58. Leave encashment while still employed
Which leave encashment is fully taxable for a private sector employee?
- A.Encashment at retirement, within the ₹25 lakh limit
- B.Encashment received by the family after the employee's death
- C.Encashment at resignation, within the ₹25 lakh limit
- D.Encashment of leave during service, under an annual encashment policy
Show answer
Answer: D. Encashment of leave during service, under an annual encashment policy
Leave encashed while still in service is taxed as salary in the year received. At retirement or resignation, non-government employees get an exemption up to the least of several limits, including a ₹25 lakh lifetime cap. Amounts paid to legal heirs after death are not taxed as salary.
59. Employer NPS deduction under the new regime
For FY 2025-26, an employee on the new regime has basic plus DA of ₹80,000 a month. The employer contributes 10% of basic to NPS. What is the maximum employer NPS contribution deductible under the new regime for the year?
- A.₹1,34,400, at 14% of basic plus DA
- B.₹96,000, at 10% of basic plus DA
- C.₹50,000, a flat limit for all
- D.Nil, as NPS is not allowed in the new regime
Show answer
Answer: A. ₹1,34,400, at 14% of basic plus DA
Under the new regime, employer NPS contributions are deductible up to 14% of basic plus DA. Annual basic is ₹9,60,000, so the limit is ₹1,34,400; the actual ₹96,000 is fully deductible. Employer contributions to PF, NPS and superannuation above ₹7.5 lakh in total are taxable.
60. Pay in lieu of notice from the employer
An employer ends an employee's service immediately and pays one month's salary in lieu of notice in the F&F. How is this amount treated for tax?
- A.As a tax-free gift from the employer
- B.As capital receipts, outside salary income
- C.As exempt compensation up to ₹5 lakh
- D.As taxable salary, with TDS in the F&F
Show answer
Answer: D. As taxable salary, with TDS in the F&F
Payment in lieu of notice is compensation connected with the termination of employment, so it is taxed as salary (profits in lieu of salary). Payroll includes it in the final TDS computation. It is different from a notice recovery, where the employee pays the employer.
