Are you preparing for Tax interviews? Here are some lists of top income tax interview questions and answers.
Did you know that Income tax is a tax imposed by the government on an individual’s or business’ income? The purpose of income tax is to generate revenue for the government to fund public services and programs. There are many different aspects of income tax, such as deductions, credits, and exemptions, which can be used to lower the amount of tax an individual or business is required to pay. Understanding these concepts and how to navigate the income tax system is important for anyone responsible for filing taxes or advising others on tax-related matters. Preparation of basic questions related to the Tax interview helps to crack the interviews successfully.
Income Tax Interview Questions and Answers
1. Mention some insights on Tax.
Income tax is a way for the government to collect funds to be used for public expenditures and social security programs. The tax is calculated based on the income earned by individuals for the previous year, and the rates for the current assessment year are determined by the Central Government in the Union Budget.
2. What is Income tax and how is it calculated?
Income tax should be paid to the government by every individual or business person. In general, the process of calculating income tax involves determining your taxable income, which is your total income minus any deductions or exemptions that you are eligible for. This taxable income is then compared to the income tax slab for the financial year, and tax is calculated at the applicable rate for each slab.
3. Explain Assessment year
The assessment year is the period starting on 1 April and ending on 31 March, and it is the year immediately following the financial year. During this period, individuals are required to file their income tax returns and pay any taxes owed on the income earned in the previous financial year.
4. Explain previous year
The previous year, also known as the financial year, is the year in which the income is earned and becomes taxable in the following assessment year. The assessment year is the period in which the income earned in the previous year is assessed for tax purposes.
5. Explain Financial year
A financial year is 12 months starting on 1st April and ending on 31st March, which is used to calculate various annual financial statements in businesses and organizations. This period is used to measure the financial performance of an entity, its income, expenses, profits, and losses.
6. What are the difference between the Financial year, assessment, and previous year?
Both the assessment year and the previous year are types of the financial year, which consist of 12 months starting from 1st April to 31st March. The previous year, also known as the financial year, is the year in which the income is earned and becomes taxable in the following assessment year. The assessment year is the period in which the income earned in the previous year is assessed for tax purposes.
7. Explain the term Person
The definition of “person” under the Income Tax Act can vary depending on the country and the specific laws of that jurisdiction. It’s important to consult with a tax professional or refer to the specific laws in your jurisdiction for more information.
8. What do you mean by total income?
Total income is the amount on which income tax is paid. It is the total amount of income earned by an individual or organization, including income from various sources such as employment, business or profession, house property, capital gains, and other sources.
9. What are all the heads in the total income?
There are five heads in the total income such as salary income, house property income, profit from the business, capital gain, and income from others.
10. What price do firms need to pay tax on their income?
Generally, income tax should be paid for 30% of the profit.
11. Does residential status affect tax liability?
An individual’s tax liability is affected by their residential status as determined by the Income Tax Act of 1961. The residential status of a taxpayer determines whether their Indian income or foreign income is taxable in India. It also depends on the place and time of accrual or receipt of income.
12. How residential status can be calculated?
The Income Tax Act categorizes individuals as either Resident or Non-Resident for tax purposes. Section 6(1) of the Act states that an individual is considered a resident of India in a given financial year (also known as a “previous year” under the Act) if they satisfy any one of the following conditions: He has been in India for at least 182 days during the financial year in question, or He has been in India for 60 days or more during the financial year in question and 365 days or more during the 4 years immediately preceding the financial year in question. Alternatively, an individual is considered a Non-Resident if he does not satisfy any of the above conditions
13. What are the conditions for residents and non-resident citizens?
The individual is a Resident of India in at least 9 out of 10 previous years preceding the relevant previous year as per the basic conditions that satisfy the residential status of an individual. The individual is in India for at least 730 days during the 7 years preceding the relevant previous year.
14. Who are residents but not an ordinary residents?
A “resident but not ordinary resident” is an individual who does not meet the criteria for being considered a “resident” in India for 9 out of the 10 preceding years, or who has spent 729 days or less in India during the 7 preceding years. They are considered Non-Resident Indians (NRI).
15. Who is considered a Non-resident?
An individual will be considered a Non-Resident Indian (NRI) if they do not fulfill either of the following conditions in a given year: They have been present in India for at least 182 days during that year or they have been present in India for at least 365 days during the 4 preceding years and at least 60 days in that year.
16. What is Accrued income?
Accrued income refers to income that has been earned but not yet received. This type of income is recorded in the same accounting period in which it is earned, rather than in the period in which it will be received. This is known as the accrual basis of accounting.
17. Define FBT
FBT stands for Fringe Benefits Tax, which is a tax that an employer is required to pay on certain benefits provided to employees in addition to their cash salary. Fringe benefits include things such as company cars, housing, stock options, and other non-cash benefits.
18. Define Tax Audit
A tax audit is an examination of an organization’s or individual’s tax return by the Internal Revenue Service (IRS) to ensure that the income and deductions reported on the return are accurate and compliant with tax laws and regulations. The purpose of a tax audit is to verify that the information provided on a tax return is true and correct and that the tax liability has been correctly calculated.
19. Define Tax Refund
The tax which has been paid more to the government and that government returns the refund is known as a Tax refund.
20. What do you mean by Capital gain and long-term capital gains? And how does it differs from short-term capital gains?
Long-term capital gains are taxed at a lower rate than short-term capital gains. This is because they are considered to be a reward for holding onto an asset for a longer period, which is seen as less speculative and more of a long-term investment strategy. The specific tax rate for long-term capital gains can vary depending on the individual’s income tax bracket and the type of asset being sold. It’s important to consult a tax professional for specific questions about how capital gains taxes may apply to your situation.
21. Define deferred tax
Deferred tax is a liability that a company must recognize on its balance sheet for taxes that it will owe in the future. This can occur when there is a difference between the company’s financial reporting and tax reporting, such as when a company reports income or expenses for accounting purposes but they are not tax deductible or taxable in the same period.
22. Define the term working capital
Working capital is important for businesses because it helps to ensure that they have the funds available to pay for daily expenses such as rent, utilities, and employee salaries, and to purchase materials and inventory. Adequate working capital also allows a company to invest in growth opportunities and take advantage of unexpected business opportunities.
23. Explain the Alternative minimum tax
The Alternative Minimum Tax is a separate system for calculating taxable income for higher-income taxpayers that limits certain deductions to prevent tax evasion. It is designed to ensure that wealthy individuals pay at least a minimum amount of taxes, even if they would otherwise be able to reduce their tax liability through deductions and credits. If the regular tax calculation results in a lower tax liability than the AMT, the taxpayer must pay the higher AMT amount.
24. Explain Deferred tax asset
A deferred tax asset is an asset recorded on a company’s balance sheet that represents the future tax savings that the company expects to realize as a result of a difference between the tax basis of an asset or liability and its financial reporting basis. It arises when a company has overpaid taxes, such as paying taxes early or paying more taxes than it owed and is entitled to receive a refund from the tax authorities. This overpaid amount is recorded as a deferred tax asset, also known as a provision for future taxation, on the balance sheet.
25. What do you mean by Intercompany reconciliation?
Inter Company Reconciliation (ICR) is the process of reconciling the financial statements of a parent company and its subsidiaries for tax and reporting purposes. This process is important for companies that have subsidiaries or operate in multiple locations. ICR helps to ensure accurate reporting by avoiding double counting of transactions, and it helps to prevent misrepresentation of a company’s financial position. It is commonly used when preparing combined or consolidated financial statements for tax and reporting purposes.
26. Explain securities transaction tax
Securities Transaction Tax (STT) is a tax imposed on the purchase and sale of securities listed on Indian stock exchanges. It was introduced in India in the 2004 budget and went into effect on October 1, 2004. The tax is levied on the amount of the transaction and its main purpose is to prevent tax evasion on capital gains by imposing a tax on securities transactions. The tax is only applicable to transactions of securities listed on Indian stock exchanges.
27. Tell about PAN
A permanent Account Number (PAN) is a unique, 10-digit alphanumeric identifier issued by the Income Tax Department in India. It is issued in the form of a laminated card and serves as a primary means of identification for an individual or entity for tax purposes. PAN links all financial transactions of an individual or entity with the Income Tax Department, including tax payments, TDS/TCS credits, returns of income, wealth, gifts, FBT, specified transactions, and correspondence. The main purpose of PAN is to help the department keep accurate records of an individual or entity’s financial transactions and to prevent tax evasion by ensuring that all financial transactions can be traced back to a specific individual or entity.
28. Explain Amortization
Amortization refers to the process of spreading the cost of an intangible asset, such as a patent, trademark, or license, over its useful life. It is the systematic allocation of the cost of an intangible asset over some time, usually through the use of periodic charges to expense.
29. Explain Fair rent
Fair rent is the rent charged for a private property that is determined and registered by a rent officer, taking into account factors such as the size, condition, and usefulness of the property. The fair rent is intended to be a reasonable and fair amount for the use of the property. It is calculated in place of mortgage interest, other financing costs, and depreciation related to certain properties, including land, buildings, and non-movable equipment.
30. What is Excise and service tax?
An excise tax is an indirect tax that is imposed on the production, sale or use of certain goods and products. It is typically applied to goods that are considered harmful or luxury items, such as cigarettes, alcohol, gasoline, and gambling. Service tax is an indirect tax on service providers for certain services. The tax is typically paid by the customers who use the services, but it is the service providers that are responsible for collecting and remitting the tax to the government.
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