Unit 10 Income-tax and Corporate Tax Planning PYQ’s 27th June 2025

The correct answer is – ₹1,500

Key Points

• Section 10(32) Exemption
  • Under Section 10(32) of the Income Tax Act, an individual is entitled to an exemption in respect of income of a minor child that is clubbed with their income under Section 64(1A).
  • The exemption amount is limited to ₹1,500 per minor child.
  • If the income of the minor child exceeds ₹1,500, only ₹1,500 is allowed as an exemption, and the balance is taxable in the hands of the individual.
• Applicability of Clubbing Provisions
  • Income of a minor child is clubbed with the income of the parent whose income is higher, as per Section 64(1A).
  • Exemption under Section 10(32) applies only for clubbed income and not for income earned separately by the child.

Additional Information

• Income of Minor Child
  • Income earned by a minor child from manual work or skill, talent, or specialized knowledge is not clubbed under Section 64(1A).
  • Income derived from investments made by the parent in the name of the child is subject to clubbing provisions.
• Exclusions from Clubbing
  • If the minor child suffers from a disability specified under Section 80U, their income is not clubbed with the parent’s income.
  • Examples of disabilities include blindness, cerebral palsy, autism, etc., as defined under the Income Tax Act.
• Taxation of Clubbed Income
  • Clubbed income is taxed at the tax rate applicable to the parent whose income is higher.
  • Parents must ensure proper documentation to claim exemptions under Section 10(32).

The correct answer is – A-IV, B-III, C-I, D-II

Key Points

• Deduction of Tax at Source (TDS) on fees for professional and technical services
  • Covered under Section 194J of the Income Tax Act.
  • Applies to payments for services such as professional, technical, royalty, or non-compete fees.
• Deduction of Tax at Source from income by way of rent
  • Covered under Section 194-I.
  • Includes payments for renting land, buildings, furniture, or machinery.
• Deduction of Tax at Source from winnings from lotteries or crossword puzzles
  • Covered under Section 194B.
  • Applies to winnings exceeding a specific threshold, subject to TDS at applicable rates.
• Deduction of Tax at Source from interest on securities
  • Covered under Section 193.
  • Refers to interest income earned on securities like bonds or debentures.

Additional Information

• Thresholds for TDS
  • Each section has specific thresholds for tax deduction. For example:
    • Section 194J: TDS applies if the payment exceeds ₹30,000 in a financial year.
    • Section 194-I: Threshold varies for rent of land/buildings (₹2,40,000 annually).
• Rates of TDS
  • TDS rates are determined under each section:
    • Section 194J: 10% for professional fees.
    • Section 194-I: 10% for land/building rent, 2% for plant/machinery rent.
    • Section 194B: 30% on winnings.
    • Section 193: 10% on interest on securities.
• Applicability
  • These sections are applicable to both individuals and businesses, with some exceptions (e.g., individuals not subject to tax audit).

The correct answer is – on or before December 15 of the previous year

Key Points

• Advance Tax
  • An assessee is required to pay advance tax if their total tax liability exceeds ₹10,000 in a financial year.
  • Advance tax is paid in installments during the financial year rather than at the end of the year.
• Installment Requirements
  • For an assessee (except those covered under Section 44AD or Section 44ADA), the advance tax is payable in four installments:
    • 15% of the total tax liability by June 15
    • 45% (cumulative) by September 15
    • 75% (cumulative) by December 15
    • 100% by March 15
  • As per the question, the assessee must pay up to 75% of advance tax by December 15.
• Exception
  • Taxpayers opting for presumptive taxation under Section 44AD or Section 44ADA are required to pay their entire advance tax liability in a single installment by March 15.

Additional Information

• Section 44AD
  • This section provides a presumptive taxation scheme for eligible businesses with a turnover of up to ₹2 crore.
  • Under this scheme, income is presumed to be 8% (or 6% for digital transactions) of turnover or gross receipts.
• Section 44ADA
  • This section provides a presumptive taxation scheme for professionals with gross receipts of up to ₹50 lakh.
  • Under this scheme, income is presumed to be 50% of gross receipts.
• Consequences of Non-Payment
  • Failure to pay advance tax or underpayment of installments results in interest under Section 234B and Section 234C of the Income Tax Act.
  • Section 234B: Interest for non-payment of 90% of total tax by March 31.
  • Section 234C: Interest for delayed or insufficient payment of advance tax installments.

The correct answer is – B, D and E Only

Key Points

• Section 91 Deduction
  • This deduction is available to prevent double taxation of income for Indian residents.
  • The assessee must be a resident in India during the relevant previous year.
• Income Accrued Outside India
  • The income must have accrued or arisen outside India during the previous year.
  • This ensures the foreign-sourced income is eligible for the deduction.
• Taxes Paid Outside India
  • The assessee must have paid tax (either by deduction or otherwise) on this foreign-sourced income.
  • The tax payment must be under the law in force in the foreign country.

Additional Information

• Double Taxation Avoidance
  • Double taxation occurs when the same income is taxed in two different countries.
  • To mitigate this, India provides relief under Section 91 if no Double Taxation Avoidance Agreement (DTAA) exists.
• Applicability of Section 91
  • Applies only when the assessee is a resident and the income has been taxed both in India and the foreign country.
  • The relief is computed based on the lower of the Indian tax rate or the foreign tax rate.
• Scope of Resident Status
  • Resident status is determined based on the residential rules under the Income Tax Act, 1961.
  • Non-residents are not eligible for the deduction under Section 91.

The correct answer is – two unrelated persons enter into a transaction in uncontrolled conditions

Key Points

• Arm’s Length Price
  • The term Arm’s Length Price is defined in Section 92F of the Income Tax Act, 1961.
  • It refers to the price that would be charged when two unrelated parties transact in uncontrolled conditions.
  • It ensures that the price of a transaction between related parties is the same as it would be if the parties were unrelated.
• Unrelated Persons
  • Unrelated persons are parties who act independently and do not influence each other’s financial or business decisions.
  • Arm’s Length Price assumes that such parties transact without any bias or external control.
• Uncontrolled Conditions
  • Uncontrolled conditions are market-driven situations where transactions occur without any external influence, such as price manipulation or coercion.
  • This ensures that the transaction price reflects a fair and competitive market value.

Additional Information

• Controlled vs. Uncontrolled Conditions
  • Controlled conditions occur when related parties influence the terms of the transaction (e.g., price, quality, or quantity).
  • Uncontrolled conditions ensure that transactions take place at a market-driven price without any undue influence.
• Related vs. Unrelated Persons
  • Related persons include entities or individuals who have a close relationship, such as subsidiaries, associates, or family members.
  • Unrelated persons are independent parties that do not have any special or close relationship.
• Objective of Arm’s Length Price
  • Arm’s Length Price ensures fairness and prevents tax avoidance by related entities through transfer pricing.
  • It is primarily used in international transactions and specified domestic transactions between related parties.
  • Helps maintain compliance with global standards, such as the OECD guidelines for transfer pricing.

The correct answer is – ₹75,000 or gross salary, whichever is lower

Key Points

• Standard Deduction for Alternative Tax Regime
  • From Assessment Year 2025-26, a standard deduction has been introduced for salaried individuals opting for the alternative tax regime under Section 115BAC.
  • The deduction is ₹75,000 or gross salary, whichever is lower.
  • This provides relief to salaried taxpayers who choose the new tax regime, which previously did not allow many common deductions.
• Section 115BAC Overview
  • Introduced in the Finance Act 2020, the section allows taxpayers to opt for a simplified tax regime with lower tax rates but fewer exemptions/deductions.
  • Key exclusions include deductions like HRA, LTA, standard deduction (previously), and others.
  • The addition of the standard deduction from AY 2025-26 aims to make the regime more attractive for salaried taxpayers.

Additional Information

• Comparison of Old vs. New Tax Regime
  • Old Regime: Allows several exemptions and deductions, such as HRA, LTA, Section 80C investments, medical insurance premiums, etc.
  • New Regime: Offers lower tax rates but restricts most exemptions and deductions. The addition of the standard deduction enhances its appeal.
  • Taxpayers must evaluate their income structure and deductions to decide which regime is more beneficial.
• Standard Deduction in Income Tax
  • The standard deduction is a flat deduction from salary income to reduce taxable income.
  • Under the old regime, salaried individuals were eligible for a deduction of ₹50,000 from gross salary.
  • From AY 2025-26, the new regime includes a standard deduction of ₹75,000 or gross salary, whichever is lower.

The correct answer is – Non-Agricultural income of more than the exemption limit and agricultural income exceeding ₹5000

Key Points

• Partial integration of income
  • The scheme of partial integration is applicable only when an individual has both non-agricultural income exceeding the exemption limit and agricultural income exceeding ₹5000.
  • This integration ensures that the taxation of non-agricultural income takes into account the impact of agricultural income, which is otherwise exempt from tax.
• Exemption limit
  • The exemption limit refers to the income threshold up to which an individual is not required to pay any tax. For example, the exemption limit for individuals below 60 years is ₹2,50,000.
  • Only if the non-agricultural income crosses this limit does the scheme of partial integration apply.

Additional Information

• Agricultural income
  • Agricultural income refers to income derived from sources like farming, rent from agricultural land, or income from the sale of crops.
  • In India, agricultural income is exempt from tax as per Section 10(1) of the Income Tax Act.
• How partial integration works
  • If the scheme applies, the agricultural income is added to the non-agricultural income to compute the tax liability.
  • However, the tax is computed only on non-agricultural income after considering the impact of the agricultural income on the applicable tax slab.
• Rationale
  • The purpose of the scheme is to prevent taxpayers from exploiting the tax exemption on agricultural income by misclassifying taxable income as agricultural income.
  • It ensures fairness in taxation and avoids undue tax advantages.

The correct answer is – Option 1: A and C Only

Key Points

• Tax avoidance refers to the legitimate arrangement of financial affairs to minimize tax liability within the boundaries of the law.
  • This aligns with statement A, which describes tax avoidance as a lawful practice for reducing taxes.
• Utilizing legal loop-holes is a key feature of tax avoidance.
  • Statement C is correct, as tax avoidance involves exploiting legal provisions or gaps in tax laws to reduce tax liability.
• Statements B, D, and E are incorrect because they describe characteristics of tax evasion, not tax avoidance:
  • B: There is no malafide motive in tax avoidance because it is a legitimate practice.
  • D: Avoidance occurs before a tax liability arises, not after.
  • E: Tax avoidance is not the same as tax omission, which refers to failing to declare income.

Additional Information

• Tax avoidance vs. Tax evasion
  • Tax avoidance is a legal practice where taxpayers use provisions of the law to minimize their tax liability.
  • Tax evasion, on the other hand, is an illegal act where taxpayers deliberately misrepresent or hide information to reduce tax liability.
  • Examples of tax evasion include under-reporting income, inflating expenses, or hiding assets.
• Significance of tax avoidance
  • It allows individuals and businesses to optimize their financial planning.
  • Governments often revise tax laws to close loopholes exploited for tax avoidance.
• Ethics in tax avoidance
  • Although tax avoidance is legal, excessive reliance on loopholes may raise ethical concerns.
  • Governments may view aggressive tax avoidance as contradictory to the spirit of tax laws.

The correct answer is – A, B and E Only

Key Points

• Statement A – If a company is an Indian company, it will automatically be considered as a domestic company.
  • This statement is correct because under Indian tax law, all Indian companies are classified as domestic companies for taxation purposes.
• Statement B – Foreign company means a company which is not a domestic company.
  • This statement is correct as per the definition in the Income Tax Act, where a foreign company is any company that is not incorporated in India and is not classified as a domestic company.
• Statement E – Foreign income is taxable in the hands of a company resident in India.
  • This statement is correct because a resident company is taxed on its global income, including foreign income, under Indian tax laws.

Additional Information

• Statement C – The residential status of an Indian company can be non-resident in India.
  • This statement is incorrect because an Indian company is always considered a resident in India under the Income Tax Act, irrespective of where its management or operations are conducted.
• Statement D – The residential status of a foreign company can never be resident in India.
  • This statement is incorrect because a foreign company can be classified as a resident in India if its place of effective management (POEM) is in India during the relevant financial year.
• Definition of Domestic and Foreign Companies
  • A domestic company is one that is incorporated in India or declared as such under specific taxation provisions.
  • A foreign company is one that is incorporated outside India and does not meet the criteria to qualify as a domestic company.
• Global Taxation for Resident Companies
  • Resident companies in India are subject to taxation on their global income, including income earned from foreign sources.
  • Non-resident companies are taxed only on income earned or accrued within India.

The correct answer is – A-II, B-III, C-IV, D-I

Key Points

• Deduction in respect of medical insurance premium (Section 80D)
  • This section allows individuals to claim deductions for premiums paid towards health insurance for self, spouse, children, or parents.
  • The maximum deduction varies based on age and whether the insured is a senior citizen.
• Deduction in case of a person with disability (Section 80U)
  • This section is applicable to taxpayers who suffer from a disability, as defined under the Income Tax Act.
  • Fixed deductions are provided based on the severity of the disability (normal disability vs. severe disability).
• Deduction in respect of interest on loan taken for higher education (Section 80E)
  • This deduction is available to individuals for interest payments on loans taken for higher education.
  • The deduction is available for a maximum of 8 years or until the loan is fully repaid, whichever is earlier.
• Deduction in respect of contribution to Agnipath Scheme (Section 80CCH)
  • Introduced to provide tax benefits for contributions made to the Agnipath Scheme.
  • The section specifies the eligibility and deduction limits for individuals contributing to this scheme.

Additional Information

• Section 80D
  • This deduction can be claimed by individuals and Hindu Undivided Families (HUF).
  • It also covers preventive health check-ups, subject to specified limits.
• Section 80U
  • Disability must be certified by medical authorities as prescribed under the Income Tax rules.
  • Applicable to conditions such as blindness, mental retardation, and locomotor disabilities.
• Section 80E
  • The deduction is available to individuals who have taken loans for higher education for themselves, their spouse, children, or a student for whom they are the legal guardian.
  • Higher education includes any course pursued after completing senior secondary education.
• Section 80CCH
  • Introduced specifically to incentivize contributions to the Agnipath Scheme.
  • Taxpayers must ensure compliance with the eligibility criteria under the scheme guidelines.