300+ TOP Income Tax Interview Questions and Answers

Income Tax Interview Questions

1. How To Compute The Total Tax Liability?

After ascertaining the total income, i.e., income liable to tax, the next step is to compute the tax liability for the year. Tax liability is to be computed by applying the rates prescribed in this regard. For rates of tax, refer “Tax Rate” section. Following table will help in understanding the manner of computation of the total tax liability of the taxpayer.  Computation of total income and tax liability for the year:- Particulars Amount Income from salary XXXXX

2. Give some insight on Income Tax.
This question is a basis of an income tax interview round. Income tax is levied by the government on the incomes earned by individuals to carry out public expenditures or outlays to realize the goal of social security. The tax is charged for the assessment year at the rates fixed by the Central Government in the Union Budget for the assessment year in respect to the previous year.

3. How is the Income Tax calculated?
Income Tax is calculated on the basis of the total income of an individual related to salaries, profits of businesses, capital gains, house property, and other resources. The income tax is calculated using the tax slab that has been issued by the government every financial year.

4. What do you mean by the term Total Income?
The amount on which Income Tax is paid including all income that arises, accrue, received, or earned in India is the Total Income. It doesn’t include the income which arises outside the country. It is the total amount that is earned by an individual or an organization including income from providing services or employment, payments from pension plans, income from dividends, revenue from sales. The total income is calculated for the assessment of taxes, determining an individual’s or organization’s ability to make payments on a debt, or evaluating the net worth of a company.

5. What is Financial Year, Previous Year, and Assessment Year?
The year starting from 1st April to 31st March is the Financial Year. It is used for calculating various financial assessment statements annually in businesses and organizations.

The year immediately succeeding the financial year where the income of the previous financial year is assessed is known as Assessment Year. For collecting tax the Government uses the assessment year to assess the previous year.

The year in which income is earned and becomes taxable in the following assessment year is known as the Previous Year. Example: 2020-2021 be the present assessment year then 2019-2020 will be the Previous Year.

6. What do you mean by Assessee?
A person who is liable to pay tax or any other sum of money under the Income Tax Act is known as an Assessee. It includes everyone in reference to any proceeding under this Act has been taken for the assessment of his income or of the income of the other person in respect of whom he is assessable, or any loss sustained by him or by such other person, or of the amount refunded due to him or to such other person, and also a person who is considered to be an assessee under any provision of this Act.

7. How to decide the residential status of profits or income taxpayers?
According to the provisions of the Income Tax Act, the residential status of an individual is categorized as Resident and Non-Resident.

So under Section 6(1), an individual is said to be a resident of India in any previous year if he satisfies any one of the basic conditions i.e, he is in India in the previous year for a period that is at least 182 days or he is in India for a period of a minimum of 60 days during the relevant previous year and at least for 365 days during the four years preceding that of the previous year.

If any person doesn’t fulfill this provision irrespective of their nationality they are termed as Non-resident.

8. How does the tax liability of an individual gets affected because of his residential status?
The liabilities of a private does get affected thanks to his residential status as per Section 5 of the tax Act and is additionally hooked into the place and time of receipt of the income. There’s a difference between Indian income and Foreign income as Indian income is always taxable in India in accordance with the residential status of the individual paying the tax.

9. What is Indian Income?
Indian income is the income received or deemed to be received in India during the previous year and simultaneously accrual income or deemed accrual in India during the previous year. It is also the income received or deemed to be received in India during the previous year but it accrues outside India during the previous year, or the Income has been received outside India during the previous year but has been accrued in India during the previous year is also termed as Indian income.

10. Which income can be considered as an accrued income?
The income which is earned but has not been received is known as accrued income. The income needs to be recorded in the same accounting period in which it is earned nor in the future period in which it will be received.

11. What do you understand about Fringe Benefits Tax?
Fringe Benefit Tax is the tax that an employer has to pay in respect of the benefits that are given to his employers in addition to the salary. It is payable in preference to the value of the fringe benefits provided or to have been provided by the employer to his employees during the previous year.

12. What do you mean by Capital Gain?
The profit that is earned by selling an asset means capital gain. When the asset is being sold the income or the gain that arises is the difference between the selling price and the actual price in which it was bought. Capital Gain can be short-term or long-term. If the asset is held for less than a year and is sold then it is termed as short-term gain but if the asset is held for more than a year to three years and sold after that then it is termed as a long-term gain.

13. What is your idea about AMT?
AMT means the Alternative Minimum Tax which uses a different set of rules to calculate the taxable income after the allowed deductions. This is a way to restrict wealthy taxpayers from tax evasion. It sets a limit for higher income tax groups on certain benefits and reduces the taxpayer’s regular tax amount. The taxpayer needs to pay a higher AMT amount if the benefits on tax reduce the total tax below the AMT limit.

14. Is there any provision in India to get a refund for an overpayment of taxes?
Yes, there is a provision of getting a refund for an overpayment of tax in India along with interest. While claiming the refund one must file the income tax return within a specific period. The refund status can be tracked on the NSDL-TIN website by entering PAN and the year of assessment for which the refund has been claimed at the Status of Tax Refunds tab.

15. What do you mean by the ICR process and how does it help?
ICR means the Inter-Company Reconciliation process helps the parent company to split from its subsidiary companies by its location. Every year the businesses that are commonly controlled need to prepare a consolidated financial statement for tax and its reporting purposes. This process helps in the maintenance of accurate reports and also helps the companies avoid misinterpretation of the financial position of the firm.

16. What is a Provident Fund? What are its types?
Provident Fund is a government-managed scheme where both employer and employee make a contribution from the employee’s salary. There are four types of Provident Fund:

  • Recognized Provident Fund – RPF is a scheme that must be approved by the Income Tax Commissioner and is applicable to an organization that employs a minimum of 20 or more employees.
  • Unrecognized Provident Fund – URPF is not approved by the Income Tax Commissioner and is started by the employers and employees in an establishment.
  • Statutory Provident Fund – SPF is mainly meant for Educational Institutes (affiliated to University) employees.
  • Public Provident Fund – PPF involves the minimum contribution of Rs.500 p.a and the maximum contribution is Rs. 100,000 p.a. The contribution made along with interest earned and is repayable after 15 years unless it is extended.

17. What do you mean by Excise Duty?
An indirect tax is levied on the goods which have been manufactured in India and are meant for personal use. The taxable person is the manufacturer and the liability of the excise duty arises on the goods manufactured. This tax is paid by the manufacturer and passes to the customers.

18. What is Service tax?
An indirect tax that is imposed on the service providers by the government on certain services but is paid by the customers is service tax. Services like AC restaurant services, hotels, inns are included in service tax.

19. What is an Excise tax and how it is different from Service tax?
Excise tax is also an indirect tax that is imposed on the manufacturer, sale, or use of certain types of goods or products. It is generally imposed on goods such as cigarettes or alcohol, and also on the price of activities like gambling. Excise taxes can be imposed by both the Federal and State authorities. It is different from service tax because it is imposed on manufactured goods whereas service tax is imposed on services provided.

20. What happens if an NRI buys a property in India, does he need to pay property tax?
Any kind of income or capital gain that an NRI generates from the sale or rent or lease of a valued property or an asset-based in India needs to pay tax as per the Income Tax rules. The long-term capital gain will be incurred on the sale of the property if the valued property is more than 3 years old, the tax is payable at 20%.

21. What is deferred tax liability? What items come under deferred tax liability?
The tax liability that a company owes and does not pay at the current point, but is responsible for paying it at some point in the near future is termed deferred tax liability. It is a balance sheet item that accounts for the difference between taxes that are due in the future and the taxes paid today.

The unrealized tax and depreciation are the type of an item that comes under deferred tax liability.

22. What is Amortization?
Amortization means when the assets of a company are written off for a number of years for their renewal or replacement and don’t depend on the life of an asset. It is not the same as depreciation.

23. What is a deferred tax asset?
When a firm pays tax early or has paid excess of tax and needs to get some money back from the tax authorities is termed as a deferred tax asset. The term is recorded in the balance sheet and is also known as a provision for future taxation.

24. What do you mean by the terms Streamlined Sales and Use Tax Agreement?
Both the terms were introduced in 1999 by the National Governor’s Association (NGA) and the National Conference of State Legislatures (NCSL) to simplify the collection of sales tax. As sales tax is the second-largest source of state revenue after personal income taxes so the collection needed to be simplified. It resulted in developing a simpler and business-friendly sales tax system. The Agreement decreased the costs and administrative burdens of the sales tax collection on retailers, especially those that are operating in multiple states.

25. What do you mean by Taxation?
Taxation is used as one of the modes by the government to finance their expenses by imposing charges on corporate entities and citizens. Government levies tax on its citizens to encourage or discourage certain economic decisions.

26. What is a Tax refund?
A tax refund means the excess tax paid by an individual than the actual owed by the individual is returned by the government. Once you file income tax for the year, the income tax, tax deductions or credits, withholdings, and other factors are taken into consideration; after that, you will receive a tax refund.

27. What is Fund flow?
Fund flow is mainly based on working capital. It tells about the various sources from where the funds are generated which are very useful in understanding long-term financial strategy. The changes in current assets and current liabilities are shown through the arrangement of changes in working capital.

28. What is Cash Flow?
Cash flow is mainly based on only one element of the working capital that is cash. It starts with the opening balance of the cash and closes with the closing balance of the cash. this is very useful for understanding short-term strategies that affect the liquidity of the business. The changes in current assets and current liabilities are shown in the cash flow.

29. What do you understand by Commercial Tax?
The tax that is imposed on the scheduled commercial goods and is indirectly collected by the seller or buyer against his business transactions which now includes sales, entertainment, luxury, entry, and profession is known as Commercial Tax.

30. What do you mean by transfer income?
When someone retains the ownership of an asset and also makes an agreement to transfer its income, but the income is considered as his income and will be added to the total income then it is known as transfer income.

31. What Is The Difference Between Gross Total Income and Total Income?

Section 80C to 80U provides certain deductions which can be claimed from Gross Total Income (GTI). After claiming these deductions from GTI, the income remaining is called as Total Income. In other words, GTI less Deductions (under section 80C to 80U) = Total Income (TI). Total income can also be understood as taxable income. Following table gives a better understanding of the difference between GTI and TI

32. What Is Marginal Relief and How It Is Computed?

The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above Rs. 1 crore or Rs. 10 crore, as the case may be. Thus, while computing surcharge, in case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person) having total income of more than Rs. 1 crore, marginal relief shall be available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount Source

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