JAIIB Paper 3 • Accounting & Financial Management for Bankers (AFM) ⭐⭐⭐⭐
Taxation for Bankers: Income Tax, TDS & GST
Opening Module D — the tax framework every banker needs to appraise borrowers, comply with TDS/TCS obligations, and understand recovery notices. This guide covers the Income-tax Act Overview, Key Deductions (80QQB/80RRB/80TTA/80U), TDS & TCS, Returns, Refund & Recovery, Direct vs Indirect Tax, and an Introduction to GST — with 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 27 min read
1 Overview of the Income-tax Act
Income Tax is a direct tax on the income of individuals, HUFs, firms and companies, administered by the Central Board of Direct Taxes (CBDT). Since Tax Year 2026-27, it is governed by the new Income-tax Act, 2025, which replaced the 60-year-old Income-tax Act, 1961.
Salary
Income from employment.
House Property
Income from owned real estate.
Profits & Gains of Business/Profession
Income from carrying on a business or profession.
Capital Gains & Other Sources
Gains on asset transfer, and residual income not falling elsewhere.
2 Deductions in Respect of Certain Incomes
Beyond the general savings-linked deductions (like Section 80C), the Act provides deductions tied to specific categories of income — such as royalty earnings, export profits of certain undertakings, and income of persons with disabilities — recognising the distinct nature and policy rationale behind each.
3 Key Deductions: 80QQB, 80RRB, 80TTA & 80U
Section
Deduction For
Typical Limit
80QQB
Royalty income of authors of books
Up to ₹3 lakh
80RRB
Royalty on patents
Up to ₹3 lakh
80TTA
Interest on savings bank account (individuals/HUF, non-senior citizens)
Up to ₹10,000
80U
A person with disability (self)
₹75,000 (normal); ₹1.25 lakh (severe disability)
4 TDS and TCS
TDS (Tax Deducted at Source)
The payer deducts tax before making specified payments — salary, interest, rent, professional fees — and deposits it with the government.
TCS (Tax Collected at Source)
The seller collects tax from the buyer on specified transactions (e.g., sale of scrap, certain high-value goods) and deposits it with the government.
JAIIB tip: Both TDS and TCS exist to ensure continuous, upfront tax collection and to widen the tax base by creating a documented trail of high-value transactions.
5 Income Tax Returns
Every eligible taxpayer must file an annual Income Tax Return (ITR), declaring total income and tax paid, and claiming any refund due. The applicable ITR form varies by taxpayer category (individual, firm, company), and filing deadlines differ for non-audit and audit-requiring taxpayers.
6 Refund and Recovery
Refund
Arises when TDS/advance tax paid exceeds actual tax liability — refunded with statutory interest.
Recovery
If tax remains unpaid, the Income Tax Department can recover it via attachment of bank accounts, property, or garnishee proceedings.
JAIIB tip: Banks play a direct role in tax recovery — when the Income Tax Department issues a garnishee/attachment notice against a customer's bank account, the bank is legally bound to comply, freezing or remitting funds as directed.
7 Direct Tax vs Indirect Tax
Aspect
Direct Tax
Indirect Tax
Incidence
Falls on the same person who pays it; cannot be shifted
Can be shifted to another person (the end consumer)
Examples
Income Tax, Corporate Tax
GST, Customs Duty
Collection
Directly from the taxpayer
Via an intermediary (seller) from the final consumer
8 Introduction to GST
🧾
Definition
GST (Goods and Services Tax), introduced on 1 July 2017, is a destination-based consumption tax that replaced multiple older indirect taxes (Excise, Service Tax, VAT) under the "One Nation, One Tax" principle.
CGST + SGST
Levied together on intra-state supplies — Central and State components.
IGST
Levied on inter-state supplies — a single integrated tax.
GST Council
The joint Centre-State body (Finance Ministers) that decides GST rates and policy.
✓ Key Takeaways
The Income-tax Act, 2025 now governs direct taxation in India, from Tax Year 2026-27.
Key income-specific deductions include 80QQB/80RRB (royalties, ₹3 lakh each), 80TTA (SB interest, ₹10,000), and 80U (disability, ₹75,000/₹1.25 lakh).
TDS is deducted by the payer; TCS is collected by the seller — both widen the tax base.
Banks must comply with Income Tax Department recovery/garnishee notices against customer accounts.
GST (since 1 July 2017) unified India's indirect tax structure into CGST+SGST (intra-state) and IGST (inter-state).
📝 Top 50 JAIIB-Style MCQs on Taxation: Income Tax, TDS & GST
Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the JAIIB AFM exam — including combination-answer questions. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
📖 Overview of the Income-tax Act
1 Income Tax in India is administered by:
A. RBI
B. CBDT (Central Board of Direct Taxes)
C. SEBI
D. IRDAI
E. FEDAI
Answer: B. CBDT administers Income Tax.
2 Income Tax is classified as a:
A. Direct Tax
B. Indirect Tax
C. Neither direct nor indirect
D. A form of GST
E. A customs duty
Answer: A. Income Tax is a Direct Tax.
3 The Income-tax Act, 2025 is effective from Tax Year:
A. 2020-21
B. 2026-27
C. 2015-16
D. 1961-62
E. 2030-31
Answer: B. Effective from Tax Year 2026-27.
4 Which of these is a recognised head of income? (i) Salary (ii) House Property (iii) Capital Gains
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: D. All three are recognised heads of income.
5 The Income-tax Act, 2025 replaced which earlier Act?
A. The Income-tax Act, 1961
B. The Companies Act, 2013
C. The Banking Regulation Act, 1949
D. FEMA, 1999
E. The GST Act, 2017
Answer: A. It replaced the Income-tax Act, 1961.
🎯 Deductions in Respect of Certain Incomes
6 Deductions "in respect of certain incomes" are tied to:
A. General savings instruments only
B. Specific categories of income, such as royalties or disability income
C. No specific criteria at all
D. Only foreign income
E. Only agricultural income
Answer: B. These deductions tie to specific income categories.
7 These specific-income deductions differ from Section 80C-type deductions because they:
A. Are based on the nature of the income itself, not general savings
B. Are identical to 80C in every respect
C. Apply only to companies
D. Have no monetary limit ever
E. Apply only to GST
Answer: A. They are based on the nature of specific income.
8 Such deductions serve a policy rationale of:
A. Recognising and incentivising specific categories of income/taxpayers
B. Punishing certain taxpayers
C. Eliminating all tax revenue
D. Applying only to foreign nationals
E. Replacing GST entirely
Answer: A. They incentivise specific income categories/taxpayers.
9 Royalty income and disability-linked income are examples of:
A. Categories eligible for specific-income deductions
B. Categories exempt from all analysis
C. Categories taxed at 100%
D. Categories relevant only to GST
E. Categories with no deduction available
Answer: A. These are categories eligible for specific deductions.
10 These deductions are typically found under which broad part of the tax law?
A. Chapter VI-A type provisions
B. The GST Act exclusively
C. FEMA, 1999
D. The Companies Act, 2013
E. The Banking Regulation Act, 1949
Answer: A. Such deductions fall under Chapter VI-A-type provisions.
📋 Key Deductions: 80QQB, 80RRB, 80TTA & 80U
11 Section 80QQB provides a deduction for:
A. Royalty income of authors of books
B. Interest on savings bank accounts
C. Disability income
D. House rent paid
E. Life insurance premium
Answer: A. 80QQB covers authors' royalty income.
12 Section 80RRB provides a deduction for:
A. Royalty on patents
B. Savings bank interest
C. Housing loan interest
D. Life insurance premium
E. Medical insurance premium
Answer: A. 80RRB covers patent royalty.
13 The typical deduction limit under 80QQB and 80RRB is:
A. ₹10,000
B. ₹3 lakh
C. ₹75,000
D. ₹1.25 lakh
E. No limit at all
Answer: B. Both are capped at ₹3 lakh.
14 Section 80TTA provides a deduction on:
A. Interest on savings bank account, up to ₹10,000
B. Royalty income
C. Fixed deposit interest without limit
D. Housing loan principal
E. Life insurance premium
Answer: A. 80TTA covers SB interest up to ₹10,000.
15 Section 80U provides a deduction for:
A. A person with disability (self)
B. Savings bank interest
C. Royalty on patents
D. Housing loan interest
E. Business turnover
Answer: A. 80U covers self-disability.
16 Under Section 80U, the deduction for severe disability is:
A. ₹75,000
B. ₹1.25 lakh
C. ₹10,000
D. ₹3 lakh
E. No deduction available
Answer: B. Severe disability deduction is ₹1.25 lakh.
💰 TDS and TCS
17 TDS is deducted by the:
A. Payee
B. Payer
C. RBI
D. GST Council
E. Notary Public
Answer: B. The payer deducts TDS.
18 TCS is collected by the:
A. Buyer
B. Seller
C. RBI
D. GST Council
E. Notary Public
Answer: B. The seller collects TCS.
19 TDS applies to payments such as: (i) Salary (ii) Interest (iii) Professional fees
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: D. TDS applies to salary, interest, and professional fees.
20 TDS and TCS both help to:
A. Widen the tax base and ensure upfront tax collection
B. Eliminate the need for any tax return
C. Reduce government revenue
D. Apply only to foreign transactions
E. Replace GST entirely
Answer: A. Both widen the tax base and ensure upfront collection.
21 TCS is typically applicable on transactions such as:
A. Sale of scrap or specified high-value goods
B. Payment of salary only
C. Payment of rent only
D. Professional fees only
E. Interest on fixed deposits only
Answer: A. TCS applies to scrap/specified high-value goods sales.
📝 Income Tax Returns
22 An Income Tax Return (ITR) declares:
A. Total income and tax paid
B. Only the taxpayer's address
C. Only GST liability
D. Only bank account details
E. Nothing of relevance
Answer: A. ITR declares total income and tax paid.
23 The applicable ITR form varies by:
A. Taxpayer category (individual, firm, company)
B. The taxpayer's favourite colour
C. Nothing; one form fits all
D. Only the taxpayer's age
E. Only the taxpayer's gender
Answer: A. ITR forms vary by taxpayer category.
24 Filing deadlines for ITR typically differ between:
A. Non-audit and audit-requiring taxpayers
B. No categories at all; one deadline applies universally
C. Only foreign nationals
D. Only government employees
E. Only senior citizens
Answer: A. Deadlines differ for non-audit vs audit cases.
25 Filing an ITR allows a taxpayer to claim:
A. A refund of excess tax paid
B. Exemption from all future taxes
C. A GST registration automatically
D. A banking license
E. Nothing at all
Answer: A. Filing allows claiming a refund of excess tax.
26 An ITR is generally filed:
A. Once every 5 years
B. Annually
C. Only once in a lifetime
D. Monthly
E. Never required
Answer: B. ITR filing is an annual requirement.
🔁 Refund and Recovery
27 A tax Refund arises when:
A. TDS/advance tax paid exceeds actual liability
B. Tax liability exceeds tax already paid
C. No tax was ever paid
D. The taxpayer files no return
E. GST is applicable instead
Answer: A. A refund arises when excess tax is paid.
28 Tax refunds are generally paid:
A. With statutory interest
B. Without any interest ever
C. Only in foreign currency
D. Only after 20 years
E. Never paid at all
Answer: A. Refunds carry statutory interest.
29 Tax Recovery mechanisms available to the Income Tax Department include:
A. Attachment of bank accounts and property
B. No recovery mechanism at all
C. Only voluntary payment requests
D. Only imprisonment with no financial recovery
E. Only seizure of foreign assets
Answer: A. Attachment of accounts/property is a recovery tool.
30 When a bank receives a garnishee/attachment notice from the Income Tax Department against a customer account, the bank:
A. May ignore it freely
B. Is legally bound to comply
C. Must inform only the customer, with no other action
D. Must close the account permanently
E. Must report it only to RBI, taking no action
Answer: B. The bank is legally bound to comply with such notices.
31 "Garnishee proceedings" essentially mean:
A. The tax authority directs a third party (like a bank) holding the defaulter's money to pay it to the department
B. A form of GST registration
C. A type of bank guarantee
D. A voluntary tax donation scheme
E. A type of insurance claim
Answer: A. Garnishee proceedings direct a third party to pay the tax dues.
⚖️ Direct Tax vs Indirect Tax
32 A Direct Tax's burden:
A. Can always be shifted to another person
B. Falls on the same person who pays it
C. Is borne by the government itself
D. Never applies to individuals
E. Is identical to GST in every way
Answer: B. A Direct Tax's burden falls on the payer directly.
33 An Indirect Tax's burden:
A. Cannot be shifted under any circumstances
B. Can be shifted to another person (the final consumer)
C. Applies only to companies
D. Is identical to Income Tax
E. Is never collected by an intermediary
Answer: B. Indirect Tax burden can be shifted to the consumer.
34 Which of these is an example of an Indirect Tax?
A. Income Tax
B. GST
C. Corporate Tax
D. Wealth Tax (historically)
E. Capital Gains Tax
Answer: B. GST is an Indirect Tax.
35 Corporate Tax is classified as a:
A. Direct Tax
B. Indirect Tax
C. Neither
D. A form of GST
E. A customs duty
Answer: A. Corporate Tax is a Direct Tax.
36 Indirect taxes are typically collected by:
A. An intermediary (seller) from the final consumer
B. Directly from the government treasury with no collection mechanism
C. Only from foreign entities
D. Only from employees
E. Only from the RBI
Answer: A. Sellers collect indirect tax from consumers.
🧾 Introduction to GST
37 GST was introduced in India on:
A. 1 July 2017
B. 1 April 1993
C. 1 January 2000
D. 15 August 1947
E. 26 January 2015
Answer: A. GST was introduced on 1 July 2017.
38 GST replaced which older indirect taxes? (i) Excise Duty (ii) Service Tax (iii) VAT
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: D. GST replaced Excise, Service Tax and VAT.
39 GST is best described as a:
A. Origin-based production tax
B. Destination-based consumption tax
C. Direct tax on income
D. Wealth tax
E. Capital gains tax
Answer: B. GST is a destination-based consumption tax.
40 Intra-state supplies under GST attract:
A. IGST only
B. CGST and SGST together
C. No GST at all
D. Only customs duty
E. Only Excise Duty
Answer: B. Intra-state supplies attract CGST + SGST.
41 Inter-state supplies under GST attract:
A. CGST and SGST separately
B. IGST (Integrated GST)
C. No tax at all
D. Only Service Tax
E. Only VAT
Answer: B. Inter-state supplies attract IGST.
42 GST rates and policy decisions are made by:
A. The GST Council
B. RBI alone
C. SEBI alone
D. Individual states acting entirely independently
E. The Notary Public
Answer: A. The GST Council decides rates and policy.
🔁 Comprehensive Review
43 The GST Council comprises:
A. Finance Ministers of the Centre and States
B. Only bank CEOs
C. Only the RBI Governor
D. Only the Prime Minister
E. Only foreign delegates
Answer: A. The GST Council includes Centre and State Finance Ministers.
44 The "One Nation, One Tax" principle underlying GST aims to:
A. Create a fragmented, state-specific indirect tax system
B. Unify India's indirect tax structure across states
C. Abolish all taxation entirely
D. Apply only to exports
E. Replace direct taxes entirely
Answer: B. GST unifies India's indirect tax structure.
45 A bank appraising a borrower's compliance record would check:
A. Only GST filings, ignoring Income Tax entirely
B. Both Income Tax and GST compliance, as relevant to the business
C. Neither, since taxation is irrelevant to credit appraisal
D. Only foreign tax filings
E. Only the borrower's personal astrology
Answer: B. Both tax compliance streams matter for credit appraisal.
46 A bank failing to comply with a valid tax attachment notice on a customer's account risks:
A. No consequence whatsoever
B. Its own liability/penalty for non-compliance
C. Automatic tax exemption
D. Praise from the customer
E. Immediate closure of the bank
Answer: B. Non-compliance exposes the bank to its own liability.
47 TDS deducted on a customer's fixed deposit interest is reflected as:
A. A tax credit the customer can claim in their ITR
B. A permanent loss with no further recourse
C. A GST charge
D. An RBI penalty
E. A bank fee
Answer: A. TDS is claimable as a tax credit in the ITR.
48 Understanding the difference between Direct and Indirect tax helps a banker mainly to:
A. Correctly interpret a borrower's tax filings and cost structure
B. Set the RBI's repo rate
C. Issue currency notes
D. Approve GST registration applications
E. Draft the Union Budget
Answer: A. This distinction helps interpret filings/cost structure.
49 A company's GST input tax credit mechanism primarily aims to:
A. Avoid cascading (tax-on-tax) effects across the supply chain
B. Increase the total tax burden deliberately
C. Eliminate GST altogether
D. Apply only to exports
E. Replace Income Tax entirely
Answer: A. Input tax credit avoids cascading tax effects.
50 For JAIIB purposes, the single most important reason bankers study taxation is to:
A. Understand borrowers' tax obligations, compliance status, and the bank's own TDS/recovery responsibilities
B. Personally file tax returns on behalf of every customer
C. Replace the Income Tax Department entirely
D. Avoid any interaction with tax authorities
E. Set GST rates for the country
Answer: A. Understanding tax obligations and the bank's own compliance role is key.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, as of September 2026. Tax provisions change frequently — candidates should cross-check the latest official IIBF syllabus and current Income Tax/GST notifications before the exam.