40 interview questions with concise answers on "Income from Salary

Here are 40 interview questions with concise answers on "Income from Salary" under the Indian Income Tax Act:

Basic Level (Conceptual Understanding)

Q: What is "Income from Salary" under the Income Tax Act?
A: Income received by an employee from an employer in cash, kind, or as a facility is taxable under the head "Salaries".
Q: What is the basis of charge for salary income?
A: Salary is taxable on due or receipt basis, whichever is earlier.
Q: What are the components of salary?
A: Basic pay, DA, bonus, commissions, perquisites, allowances, and retirement benefits.
Q: What is the tax treatment of advance salary?
A: Advance salary is taxable in the year of receipt.
Q: What is the treatment of arrears of salary?
A: Taxed in the year of receipt; eligible for relief under Section 89(1).

Allowances

Q: Are all allowances taxable?
A: No. Some allowances are fully taxable, some are fully exempt, and some are partially exempt under Section 10.
Q: Name a few fully taxable allowances.
A: Dearness Allowance, City Compensatory Allowance, Overtime Allowance.
Q: Which allowances are partially exempt?
A: HRA, Children Education Allowance, Transport Allowance (for disabled employees), Hostel Expenditure Allowance.
Q: What is HRA exemption rule?
A: Under Section 10(13A), least of the following is exempt:

Q: Is medical allowance exempt?
A: No. Medical allowance is fully taxable. (Reimbursement up to ₹15,000 was earlier exempt but now withdrawn.)

Perquisites

Q: What are perquisites?
A: Benefits provided by the employer in addition to salary, e.g., rent-free accommodation, car, concessional loan.
Q: Are all perquisites taxable?
A: Most are taxable except those specifically exempt under rules.
Q: Give an example of tax-free perquisite.
A: Medical facility in employer’s hospital or health insurance premium paid by employer.
Q: What is the taxability of rent-free accommodation?
A: It is a taxable perquisite; valuation depends on whether the employer is government or private.
Q: What is the taxability of use of motor car?
A: It depends on car ownership, usage (official/personal), and expenses borne.

Provident Funds and Retirement Benefits

Q: Is employer contribution to PF taxable?
A: Employer contribution up to 12% of salary to Recognized PF is exempt. Excess is taxable.
Q: What is the treatment of interest on PF?
A: Interest >9.5% p.a. on Recognized PF is taxable.
Q: Is gratuity taxable?
A: It is exempt up to ₹20 lakhs for non-government employees covered under the Gratuity Act.
Q: What is tax treatment of leave encashment?
A: Fully exempt for government employees. For others, exemption up to ₹3,00,000 u/s 10(10AA).
Q: What about commuted pension?
A: Fully exempt for government employees. For others, partially exempt under Section 10(10A).

Deductions and Reliefs

Q: Can Standard Deduction be claimed under salary?
A: Yes, ₹50,000 is allowed as a standard deduction u/s 16(ia).
Q: What is Professional Tax treatment?
A: Deductible from salary income under Section 16(iii), up to ₹2,500 p.a.
Q: What is Section 89(1) relief?
A: It provides tax relief on arrears/advance salary/pension to reduce additional tax burden.
Q: Are voluntary retirement benefits exempt?
A: Yes, up to ₹5 lakhs under Section 10(10C).
Q: Is employer's contribution to NPS taxable?
A: Contribution up to 10% of salary is exempt u/s 80CCD(2) (14% for government employees).

Computation & Taxability

Q: What is the formula to compute Gross Salary?
A: Gross Salary = Basic + DA + Allowances + Perquisites + Bonus + Others.
Q: What is Net Salary?
A: Net Salary = Gross Salary – Deductions under Section 16.
Q: Under which head is family pension taxed?
A: Taxable under Income from Other Sources, not Salary.
Q: Is leave travel concession (LTC) taxable?
A: Exempt twice in a block of 4 years, subject to actual travel and limits.
Q: Is notice pay taxable?
A: Yes, notice pay received or paid is taxable under "Salaries".

Advanced/Application Based

Q: What is salary for HRA exemption?
A: Salary includes Basic + DA (if part of retirement benefits) + Commission (as % of turnover).
Q: Is bonus taxable?
A: Yes, bonus is fully taxable.
Q: Can pension received by a retired employee be taxed under salary?
A: Yes, uncommuted pension is taxable under "Salaries".
Q: Is uniform allowance exempt?
A: Exempt if used wholly and exclusively for duty.
Q: What if an employee receives gifts from employer?
A: Taxable if value exceeds ₹5,000 in a year.

New vs Old Tax Regime

Q: Is standard deduction available under the new regime?
A: Yes, ₹50,000 standard deduction is available under both regimes from AY 2024–25 onwards.
Q: Can an employee opt for the new tax regime every year?
A: Salaried employees can choose between old and new regimes every year.
Q: What are the main differences between the old and new tax regimes?
A: Old regime allows deductions and exemptions; new regime offers lower tax rates but no major deductions.
Q: Is HRA exempt under the new tax regime?
A: No, exemption for HRA is not available under the new regime.
Q: Which is better: old or new regime?
A: Depends on individual income, exemptions, and deductions claimed. If deductions are high, old may be better.

INCOME TAX BASICS