Income Tax MCQ Quiz - Objective Question with Answer for Income Tax - Download Free PDF

• Income Tax is not an example of indirect tax, it comes under the direct tax.
• Indirect tax is a type of tax collected by the government from an intermediary and are not directly transferred to the government.
• Examples of Indirect tax are service tax, sales tax etc.
• A direct tax is borne directly by the entity that pays it.
• Examples of direct taxes are income tax, corporation tax etc.

Shortcut Trick

• Trick –– "Wepro, co, in (Direct Taxes)"
  • We- Wealth Tax
  • Pro- Property Tax
  • Co- Corporate Tax
  • In- Income Tax
• Trick –– "Excuse Me (Indirect Taxes)"
  • Ex- Excise tax
  • Cu- Custom tax
  • Se- Service tax
  • M- Market tax/vat
  • E- Entertainment tax

The correct answer is 'annual'

Key Points

• Income tax is calculated on an annual basis:
  • Income tax is assessed for a financial year (known as the assessment year), which typically runs from April 1st to March 31st in most countries, including India.
  • Taxable income is calculated based on the earnings, deductions, and exemptions accrued over this annual period.
  • The annual calculation ensures that taxpayers have a full year's worth of financial data, including salary, business profits, investments, and other income sources, to determine their tax liability.
  • Governments use this annual approach to align tax obligations with the fiscal year and simplify compliance for both individuals and businesses.

Additional Information

• Monthly:
  • While taxes are not calculated monthly, certain components like tax deducted at source (TDS) may be deducted from monthly salaries or payments.
  • Monthly deductions are part of the annual tax calculation but do not represent the basis for calculating total income tax liability.
• Quarterly:
  • Quarterly filings or payments are often required for businesses or individuals who pay advance tax, but the overall tax liability is still calculated annually.
  • Advance tax is paid in installments during the financial year, based on estimated annual income.
• Weekly:
  • Taxes are not calculated or assessed on a weekly basis, as income and deductions are typically measured over longer periods to ensure accuracy and compliance with tax laws.

The correct answer is '50,000 rupees'

Key Points

• Gifts of a personal nature and taxation:
  • In India, as per the Income Tax Act, 1961, gifts received by an individual are taxable under the head "Income from Other Sources" unless they fall under specific exemptions.
  • Gifts of a personal nature, such as those received on certain occasions (e.g., wedding), are exempt from tax if their aggregate value does not exceed ₹50,000 in a financial year.
  • If the total value of gifts received exceeds ₹50,000, the entire amount becomes taxable (not just the amount exceeding ₹50,000).
  • This exemption applies only to gifts in cash or kind and does not include gifts from specified relatives, which are wholly exempt regardless of their value.
• Legal provisions and exclusions:
  • Specified relatives include parents, siblings, spouse, and direct descendants or ascendants, among others. Gifts from these individuals are not taxable.
  • Other exempt categories include gifts received on the occasion of marriage, inheritance, or as part of a will.
  • The exemption limit of ₹50,000 ensures that smaller, personal gifts remain untaxed while larger sums are brought under the tax net to prevent misuse of this provision for tax evasion.

Additional Information

• Incorrect options:
  • ₹20,000: This value is outdated and does not align with the current provisions under the Income Tax Act.
  • ₹30,000: This is also incorrect, as the exemption limit for gifts is specifically set at ₹50,000, not ₹30,000.
  • ₹1,00,000: This amount exceeds the actual exemption limit. Any gift above ₹50,000 becomes taxable unless exempted by other criteria (e.g., gifts from relatives).
• Purpose of the exemption:
  • The primary intent of this exemption is to allow individuals to receive gifts of a personal nature without facing undue tax burdens.
  • It also helps distinguish genuine personal gifts from income disguised as gifts to evade taxation.

The correct answer is '1985'

Key Points

• Central Administrative Tribunal (CAT):
  • The Central Administrative Tribunal (CAT) was established in 1985 under Article 323A of the Constitution of India.
  • It was created through the enactment of the Administrative Tribunals Act, 1985.
  • The purpose of CAT is to adjudicate disputes and complaints related to the recruitment and conditions of service of persons appointed to public services and posts under the control of the central government or any other authority under its jurisdiction.
  • CAT is independent of the ordinary judiciary and functions as a specialized tribunal for handling administrative matters.
  • It has its principal bench in New Delhi, with additional benches in other cities across India for accessibility.

Additional Information

• Option 1: 1990:
  • This is incorrect as the Central Administrative Tribunal was already functioning by 1990.
  • By this time, CAT had been operational for five years and was handling service disputes for central government employees.
• Option 2: 1975:
  • This is incorrect as the idea of tribunals gained prominence in the late 1970s, but CAT was not established until 1985.
  • The 42nd Amendment to the Constitution (1976) introduced the provision for administrative tribunals, but their actual implementation came much later.
• Option 4: 1950:
  • This is incorrect as the concept of specialized administrative tribunals did not exist in India at the time of independence or during the early years of the Constitution.
  • In 1950, the judiciary and administrative dispute resolution were handled by the regular courts.
• Significance of CAT:
  • CAT provides an alternative to traditional litigation in regular courts, ensuring speedy and cost-effective justice for government employees.
  • It reduces the burden on the judiciary by specializing in administrative disputes, particularly those related to service matters.

The correct answer is '2 Children'

Key Points

• Children Education Allowance under the Income-tax Act:
  • If you are receiving a Children Education Allowance (CEA) from your employer, you are eligible for a tax exemption under the Income-tax Act.
  • The exemption is applicable for up to a maximum of two children per taxpayer.
  • The exemption limit is Rs. 100 per child per month, which amounts to Rs. 1,200 per year per child.
  • This benefit is provided to help taxpayers reduce their taxable income, thereby lowering their tax liability.

• Income Tax is not an example of indirect tax, it comes under the direct tax.
• Indirect tax is a type of tax collected by the government from an intermediary and are not directly transferred to the government.
• Examples of Indirect tax are service tax, sales tax etc.
• A direct tax is borne directly by the entity that pays it.
• Examples of direct taxes are income tax, corporation tax etc.

Shortcut Trick

• Trick –– "Wepro, co, in (Direct Taxes)"
  • We- Wealth Tax
  • Pro- Property Tax
  • Co- Corporate Tax
  • In- Income Tax
• Trick –– "Excuse Me (Indirect Taxes)"
  • Ex- Excise tax
  • Cu- Custom tax
  • Se- Service tax
  • M- Market tax/vat
  • E- Entertainment tax

The correct answer is Personal income tax.Key Points

• A direct tax is a tax that is paid directly to the government by the taxpayer.
• It is usually based on the income or wealth of the taxpayer.
• Personal income tax is a direct tax that is levied by the government on the income of individuals, including salaries, wages, and other forms of income.
• It is a progressive tax, which means that the tax rate increases as the income of the taxpayer increases.

Additional Information

• Custom duty is a tax that is levied on goods that are imported or exported from a country.
  • It is usually charged as a percentage of the value of the goods and is collected by customs officials at the border.
• Excise tax is a tax that is levied on goods that are produced within a country.
  • It is usually charged as a percentage of the value of the goods and is collected by the government from the manufacturers or producers of the goods.
• G.S.T. or Goods and Services Tax is a tax that is levied on the sale of goods and services.
  • It is charged as a percentage of the value of the goods or services and is collected by businesses that are registered for G.S.T.

The correct answer is  (A), (B), (C), (D), (E) only

Key Points Income from other sources:

Income from other sources is income that is not exempt from taxation and cannot be deducted for tax purposes under the categories of salary, income from House property, profits and gains from businesses or professions, or capital gains.

Important Points Income chargeable under the head of income from other sources:

• Income from subletting house property
• Director fee
• Ground Rent
• Agricultural Income from outside India
• Insurance commission
• Dividend
• Interest income etc.

Mistake Points

Do note that Income from subletting house property by a tenant is only charged under "Income from Other Sources".

Income from subletting house property by the owner is charged under "Income from House Property"

The correct answer is Income Tax Return.

Key Points

• The Central Board of Direct Taxes (CBDT) has proposed a single income tax return (ITR) form for all taxpayers.

Current Scenario:

• There are seven kinds of income tax return (ITR) forms, which are used by different categories of taxpayers.

They are as follows:

• ITR Form 1, called ‘Sahaj’, is for small and medium taxpayers.
  • ​Sahaj forms can be filed by individuals who have an income up to Rs 50 lakh, with earnings from salary, one house property/ other sources (interest etc).
• ITR-2 is filed by people with income from residential property.
• ITR-3 is intended for people who have income as profits from business/ profession.
• ITR-4 (Sugam) is, like ITR-1 (Sahaj), a simple form, and can be filed by individuals, Hindu Undivided Families (HUFs) and firms with total income up to Rs 50 lakh from businesses and professions.
• ITR-5 and 6 are for limited liability partnerships (LLPs) and businesses respectively.
• ITR-7 is filed by trusts and non-profit organisations.

The correct answer is option 2

Key Points

• The Section 80D deduction in the Income Tax Act, of 1961 allows a deduction of up to Rs.25,000 per year for medical insurance premium installments.
• The policy can be for you, your spouse, or your children.
• If you or your spouse are senior citizens (60 years or more), the deduction limit will go up to Rs.50,000.

Additional Information

• ​Reduction of preventive health care check-ups -
  • If you are getting an annual health checkup done then you will be eligible for a tax deduction.
  • The cost of the checkup will be included in the limit to which you are eligible under the Section 80D deduction.
  • The limit for check-up expenses for each budgetary year is up to Rs.5000 for persons below 60 years of age and Rs.7000 for senior citizens.

The correct answer is Rs. 200

Key Points

House Rent Allowance (HRA) - It is a portion of your salary granted by your employer to cover the costs of rented housing.

Taxable Amount of HRA - According to section 10 (13A) of the income tax act 1961, is allowed as a deduction from a taxable salary. HRA exemption is allowed least of the following:

Taxable HRA = Actual HRA Received - HRA Exempted

Analysis:

In the question given above:

Conclusion:

Taxable HRA = Actual HRA Received - HRA Exempted

= Rs. 500 - Rs. 300

= Rs. 200

The correct answer is An increase in the value of an asset.

Key Points Capital gains:

• A capital gain is an increase in an asset's or investment's value as a result of the asset's or investment's price appreciation.
• In other terms, a gain happens when an asset's current or selling price exceeds its original purchase price.
• All kinds of capital assets, including but not restricted to stocks, bonds, goodwill, and real estate, are attributed with capital gains.

Important Points Classifications of Capital Gain:

• Capital gain can be realized or unrealized.
• The realized gain is the gain from the final sale of an asset or investment.
• Conversely, an unrealized gain arises when the current price of an asset or investment exceeds its purchase price, but the asset or investment is still unsold. 
• Realized capital gains are usually classified as short-term gains or long-term gains.
• Short-term (capital) gains occur if an asset or investment was held for less than a year.
• Long-term (capital) gains are gains from an asset or investment that was held for more than one year.

The correct answer is 80EEB.

Key Points

• The Income Tax Act of 1961's Section 80EEB focuses on the interest payments made on loans taken out to purchase an electric vehicle for personal or professional use.
• Both two-wheelers and four-wheelers can use it.
• One can avail Section 80EEB deduction until the repayment of the loan.
• A deduction of up to 1,50,000 is permitted under Section 80EEB.
• One can purchase an electric car for your own usage or for use in your business as an assessee.
• In case, a person has purchased an EV on loan for business purposes and the interest amount exceeds ₹1,50,000, then the person can include the excess amount under business expenses.
• To do this, though, one needs to make sure that the company name or the owner of the firm is included on the vehicle's registration.​

Additional Information​

• 80DDB:
  • Individuals and Hindu Undivided Families are eligible for tax deductions for medical expenses related to a certain condition under Section 80DDB
• 80GG:
  • Section 80GG of the Income Tax Act provides deductions related to house rent based on certain conditions
• 80DD:
  • Deduction under Section 80DD of the income tax act is allowed to Resident Individuals or HUFs for a dependant-who is differently-abled and– is wholly dependent on the individual (or HUF) for support & maintenance.

The correct answer is (A), (B), (C), (D) only

Key Points House Rent Allowance (HRA):

• HRA, or House Rent Allowance, is a salary portion given by employers to employees to cover housing expenses involved with renting a home.
• A person's compensation includes HRA as a key component.
• Both salaried employees and self - employed persons are covered by HRA.

Important Points Factors that affect HRA Calculation:

• Salary
• HRA Received
• Actual rent paid
• City of residence (metro, non-metro or rural)

Exemption for HRA:

The exemption on HRA is calculated as per 2A of Income Tax Rules. As per Rule 2A, the least of the following is exempted from salary under Section 10(13A) and does not form part of the taxable income.

• Actual HRA received from employer
• For those living in metro cities: 50% of (Basic salary + Dearness allowance)
• For those living in non-metro cities: 40% of (Basic salary + Dearness allowance)
• Actual rent paid minus 10% of (Basic salary + Dearness allowance)

The correct answer is Tax Planning.

Key Points

Tax planning: Tax planning is the practise of efficiently examining one's financial condition. One can lower their tax liability by using tax planning. It entails legally structuring one's income to take advantage of several exemptions and deductions.

Additional Information

 Tax Avoidance: 

Tax avoidance is the practise of reducing one's tax liability using legal means. In other terms, it is the act of utilising the tax laws in a single area for one's own advantages in order to lower one's tax liability. Tax avoidance is a legal strategy, but it is not recommended because it can be utilised to one's own benefit to lower the amount of tax that is owed.

Tax evasion: Tax evasion is the criminal practise of intentionally understating taxable income or exaggerating expenses in order to reduce tax obligations. It is an illegal effort to lessen one's tax liability.

Tax Management: The administration of money for the purpose of paying taxes is referred to as tax management. Tax management deals with timely filing of Returns, having the accounts audited, withholding tax at source, and other related issues. Tax management aids in preventing the payment of interest, penalties, and legal fees.