📊 NISM Series V-AChapter 8 of 12⚖ 4 marks weightage
Ch.8: Taxation
Practice questions for NISM-Series-VA: Mutual Fund Distributors Certification Examination
(mandated by AMFI/SEBI for mutual fund distribution).
Chapter 8 carries 4 out of 100 marks
in the final examination. The exam has 100 MCQs, 120-minute duration,
50% passing score, and −25% negative marking per wrong answer.
80
MCQ
80
Total Qs
4
Exam Marks
50%
Pass Score
−25%
Neg. Marking
What You Will Learn in This Chapter
Understand capital gains taxation for different mutual fund categories
For income tax purposes, what is the minimum percentage of equity exposure a mutual fund scheme must maintain to be classified as an 'equity-oriented fund'?
A50%
✓65%
C75%
D90%
💡 As per the Income Tax Act, a mutual fund scheme is considered 'equity-oriented' if at least 65% of its investible funds are invested in equity shares of domestic companies. This threshold is specifically for taxation purposes and differs from SEBI's classification (e.g., 75% for diversified equity schemes) for scheme categories.
Q2MCQMediumSecurities Transaction Tax (STT)
Securities Transaction Tax (STT) is levied on which of the following transactions related to mutual funds?
APurchase and redemption of units of debt-oriented mutual funds.
BPurchase and redemption of units of equity-oriented mutual funds.
CPurchase of units of equity-oriented mutual funds only.
✓Redemption or switch-out of units of equity-oriented mutual funds only.
💡 Securities Transaction Tax (STT) is applicable only on transactions involving equity-oriented mutual funds. Specifically, it is levied only on the sale (redemption or switch-out) of units of equity-oriented mutual funds. It is not levied on the purchase of equity-oriented mutual funds, nor on any transactions (purchase or sale) of debt-oriented mutual funds.
Q3MCQHardTaxation for NRIs - TDS on Capital Gains
An NRI investor redeems units of an Indian equity-oriented mutual fund after holding them for 10 months. What will be the applicable TDS rate on the capital gains?
A10%
✓15%
C20%
D30%
💡 For Non-Resident Indian (NRI) investors, Short Term Capital Gains (STCG) arising from the redemption of equity-oriented mutual fund units are subject to TDS at a rate of 15% (plus applicable surcharge and cess). This is as per Section 111A read with Section 195 of the Income Tax Act, 1961.
Q4MCQEasyTax Saving Schemes (ELSS)
What is the mandatory lock-in period for investments made in Equity Linked Savings Schemes (ELSS) to avail tax benefits under Section 80C of the Income Tax Act?
A1 year
B2 years
✓3 years
D5 years
💡 Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of 3 years from the date of investment for each unit purchased. This is the shortest lock-in period among most tax-saving instruments under Section 80C.
Q5MCQMediumTaxation of Capital Gains (Non-equity funds)
For taxation purposes, how are capital gains from units of a Gold Exchange Traded Fund (ETF) treated?
ALike equity-oriented funds, with LTCG taxed at 10% above ₹1 lakh after 12 months.
✓Like debt-oriented funds, with LTCG taxed at 20% with indexation after 36 months.
CExempt from capital gains tax if held for more than 36 months.
DAlways taxed at the investor's marginal income tax slab rate, regardless of holding period.
💡 Gold ETFs, Fund of Funds, and international funds are treated as non-equity oriented funds for capital gains taxation. Long Term Capital Gains (LTCG) arise if units are held for more than 36 months and are taxed at 20% with the benefit of indexation. Short Term Capital Gains (STCG) are taxed at the investor's marginal income tax slab rate.
Q6MCQEasyTax Saver Funds (ELSS)
What is the minimum lock-in period for investments made in an Equity Linked Savings Scheme (ELSS) to avail tax benefits under Section 80C of the Income Tax Act?
A1 year
B2 years
✓3 years
D5 years
💡 Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of 3 years from the date of investment. This is the shortest lock-in period among all Section 80C investment options, allowing investors to avail tax benefits while investing in equity.
Q7MCQMediumTDS and Taxation for NRIs
What is the applicable Tax Deducted at Source (TDS) rate on short-term capital gains (STCG) arising from the redemption of an equity-oriented mutual fund by a Non-Resident Indian (NRI)?
A10%
✓15%
C20%
D30%
💡 For Non-Resident Indians (NRIs), short-term capital gains (STCG) arising from the redemption of equity-oriented mutual funds are taxed at a special rate of 15% under Section 111A of the Income Tax Act, provided the transaction is subject to Securities Transaction Tax (STT). The TDS rate for such gains is also 15%.
Q8MCQEasySecurities Transaction Tax (STT)
Which of the following transactions related to mutual funds attracts Securities Transaction Tax (STT)?
APurchase of units of an equity-oriented mutual fund.
BSale of units of a debt-oriented mutual fund.
✓Sale of units of an equity-oriented mutual fund.
DPurchase of units of a debt-oriented mutual fund.
💡 Securities Transaction Tax (STT) is applicable only on the sale of units of equity-oriented mutual funds at the rate of 0.001% of the transaction value. It is not applicable on purchase transactions or on debt-oriented funds.
Q9MCQHardSet-off and Carry Forward of Capital Losses
An investor incurs a Long-Term Capital Loss (LTCL) from the sale of units of a debt-oriented mutual fund. Against which of the following income types can this LTCL be legally set off in the same assessment year, as per current income tax regulations?
AAgainst any head of income, including salary and house property income.
✓Only against Long-Term Capital Gains (LTCG) from any capital asset.
CAgainst both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) from any capital asset.
DOnly against Long-Term Capital Gains (LTCG) from other debt-oriented mutual funds.
💡 As per the Income Tax Act, a Long-Term Capital Loss (LTCL) can only be set off against a Long-Term Capital Gain (LTCG). It cannot be set off against Short-Term Capital Gains or any other head of income. If not fully set off, it can be carried forward for up to 8 subsequent assessment years. (Section 74 of the Income Tax Act).
Q10MCQHardTaxation of NRIs, Short-Term Capital Gains (STCG), TDS
An NRI investor redeems units from an equity-oriented mutual fund after holding them for 10 months, resulting in a capital gain of ₹2,00,000. Which of the following statements regarding TDS is correct, assuming no specific DTAA provision overrides?
ANo TDS is applicable as the gain is below the basic exemption limit.
✓TDS will be deducted at 15% on the entire ₹2,00,000 capital gain.
CTDS will be deducted at 10% on the capital gain exceeding ₹1 lakh, i.e., on ₹1,00,000.
DTDS will be deducted at the investor's applicable slab rate, as per the Income Tax Act.
💡 For an NRI, short-term capital gains (STCG) from the sale of equity-oriented mutual fund units (held for 12 months or less) are taxed at a flat rate of 15% plus applicable surcharge and cess, irrespective of the investor's slab rate. Tax Deducted at Source (TDS) is applicable for NRIs on such capital gains, and there is no basic exemption limit benefit for TDS purposes on these specific gains. Therefore, TDS will be deducted at 15% on the entire ₹2,00,000 capital gain.
Q11MCQMediumHolding Period and Indexation for Non-Equity Funds
For an investor in a non-equity oriented mutual fund, what is the minimum holding period required for the capital gains to be classified as 'long-term capital gains' and thus be eligible for indexation benefit?
AMore than 12 months.
BMore than 24 months.
✓More than 36 months.
DExactly 36 months.
💡 For non-equity oriented mutual funds (e.g., debt funds, gold funds, fund of funds), units must be held for a period of more than 36 months (i.e., greater than 3 years) for the capital gains to be classified as Long-Term Capital Gains (LTCG). Only LTCG from such funds are eligible for indexation benefit. (Section 2(42A) and Section 112 of the Income Tax Act).
Q12MCQMediumTaxation of Specific Fund Types (International FoFs)
A mutual fund scheme invests predominantly in an international equity ETF. How would the capital gains from redeeming units of this Indian FoF scheme be typically taxed for a resident individual?
AAs short-term capital gains if held for less than 12 months, and long-term capital gains with indexation if held for more than 12 months.
✓As short-term capital gains if held for less than 36 months, and long-term capital gains with indexation if held for more than 36 months.
CAs short-term capital gains if held for less than 12 months, and long-term capital gains at 10% without indexation if held for more than 12 months, subject to the Rs. 1 lakh exemption.
DAs business income, subject to applicable slab rates.
💡 As per the Income Tax Act, 1961, mutual funds investing predominantly in foreign equities are not considered 'equity-oriented funds' for tax purposes in India, even if their underlying investments are in equity. Hence, they are treated similar to debt funds. Capital gains are short-term if units are held for 36 months or less and taxed at the investor's applicable slab rates. If held for more than 36 months, they are long-term capital gains, taxed at 20% with indexation benefit.
Q13MCQMediumCost of Acquisition for Grandfathered Equity Units (Section 112A)
An investor purchased 1,000 units of an equity-oriented mutual fund on January 15, 2017, at an NAV of Rs. 100. The Fair Market Value (FMV) of these units on January 31, 2018, was Rs. 120. The investor redeems all units on March 1, 2023, at an NAV of Rs. 150. What will be the cost of acquisition per unit for calculating Long Term Capital Gain (LTCG) under Section 112A?
ARs. 100 (original cost).
✓Rs. 120 (FMV as on Jan 31, 2018).
CRs. 150 (redemption NAV).
DThe higher of Rs. 100 (original cost) or Rs. 120 (FMV as on Jan 31, 2018), capped at the actual sale price.
💡 For equity-oriented mutual fund units acquired before January 31, 2018, and sold after this date, the cost of acquisition for calculating LTCG under Section 112A (grandfathering rule) is determined as the higher of: (1) The actual cost of acquisition (Rs. 100) and (2) The lower of (i) Fair Market Value (FMV) on January 31, 2018 (Rs. 120) or (ii) Actual Sale Consideration (Rs. 150).
Applying this: Lower of (FMV Rs. 120 or Sale Consideration Rs. 150) = Rs. 120.
Then, Higher of (Actual Cost Rs. 100 or Rs. 120) = Rs. 120.
Therefore, the cost of acquisition per unit is Rs. 120.
Q14MCQMediumDefinition of Equity-oriented Fund for Taxation
For taxation purposes, a mutual fund scheme is classified as an 'equity-oriented fund' if it invests a minimum of what percentage of its investible funds in equity shares of domestic companies?
A50%
B60%
✓65%
D75%
💡 As per income tax regulations, an equity-oriented mutual fund is defined as a fund that invests at least 65% of its investible funds in equity shares of domestic companies. This classification is crucial for determining the applicable capital gains tax rates.
Q15MCQEasyTDS on Dividend Income from Debt Mutual Funds
What is the applicable Tax Deducted at Source (TDS) rate on dividend income distributed by a debt mutual fund to a resident individual, if the aggregate dividend income exceeds INR 5,000 in a financial year?
A5%
✓10%
C15%
D20%
💡 For resident individuals, if the dividend income from a debt mutual fund exceeds INR 5,000 in a financial year, the fund house is required to deduct TDS at the rate of 10% under Section 194K of the Income Tax Act.
Q16MCQEasySecurities Transaction Tax (STT)
Under which of the following scenarios is Securities Transaction Tax (STT) typically levied on mutual fund transactions?
APurchase of units of a debt fund from the AMC.
BSale of units of a Gold Exchange Traded Fund (ETF) on a recognized stock exchange.
CRedemption of units of an equity-oriented fund directly with the AMC.
✓Sale of units of an equity-oriented fund on a recognized stock exchange.
💡 Securities Transaction Tax (STT) is levied only on the sale of equity-oriented mutual fund units through a recognized stock exchange. It is not applicable to purchases of any fund, or on redemptions of debt funds, or on direct redemptions of equity funds with the AMC. Gold ETFs are treated as non-equity-oriented funds for tax purposes and do not attract STT.
Q17MCQEasySecurities Transaction Tax (STT)
On which of the following transactions in mutual funds is Securities Transaction Tax (STT) levied?
✓Redemption of equity-oriented mutual fund units.
BPurchase of debt-oriented mutual fund units.
CPurchase of equity-oriented mutual fund units.
DRedemption of debt-oriented mutual fund units.
💡 Securities Transaction Tax (STT) is levied only on the redemption of units of equity-oriented mutual funds. It is not levied on the purchase of any mutual fund units, nor on debt-oriented mutual funds.
Q18MCQHardLong Term Capital Gains on Equity Funds (Grandfathering)
An investor purchased 100 units of an equity-oriented mutual fund on December 15, 2017, at an NAV of ₹45 per unit. The NAV of the fund on January 31, 2018, was ₹60 per unit. The investor sold all units on April 10, 2023, at an NAV of ₹75 per unit. Ignoring STT, what is the total Long Term Capital Gain (LTCG) for the investor?
✓₹1,500
B₹3,000
C₹4,500
D₹7,500
💡 As per Section 112A of the Income Tax Act, for equity-oriented funds sold after April 1, 2018, if units were acquired before February 1, 2018, the cost of acquisition for LTCG calculation is the higher of: (i) actual cost of acquisition, and (ii) Fair Market Value (FMV) as on January 31, 2018 (NAV in this case), limited to the sale price.
In this case:
Actual Cost = ₹45
NAV on Jan 31, 2018 = ₹60
Sale Price = ₹75
The cost for LTCG calculation will be ₹60 (higher of ₹45 and ₹60).
LTCG per unit = Sale Price - Grandfathered Cost = ₹75 - ₹60 = ₹15.
Total LTCG = ₹15 * 100 units = ₹1,500. (LTCG up to ₹1 lakh in a financial year is exempt under Section 112A, but the question asks for the total capital gain, not the taxable amount after exemption).
Q19MCQMediumTaxation of Hybrid Funds
A Balanced Advantage Fund (BAF) dynamically manages its equity allocation, which can fluctuate between 35% and 80%. For taxation purposes, such a fund is treated as an equity-oriented fund if its:
✓Average gross equity asset allocation during the financial year is 65% or more.
BEquity allocation is 65% or more for at least 65% of the financial year.
CNet equity allocation (after hedging) is consistently above 65%.
DScheme information document (SID) explicitly states its intention to be taxed as an equity fund.
💡 For a mutual fund to be classified and taxed as an equity-oriented fund, its average gross equity asset allocation during the financial year must be 65% or more of its total assets. If the average equity allocation falls below 65%, it will be treated as a debt-oriented fund for taxation purposes, irrespective of its dynamic nature or SID statements.
Q20MCQMediumCapital Gains Taxation for Debt Funds (Post-April 2023)
An investor purchased units of a debt-oriented mutual fund on May 15, 2023, and redeemed them on June 20, 2024. The fund's portfolio consistently maintained less than 35% exposure to domestic equities. What will be the tax treatment of the capital gains arising from this redemption?
ALong-term capital gains taxed at 20% with indexation benefit.
✓Short-term capital gains taxed at the investor's applicable income tax slab rate.
CLong-term capital gains taxed at 10% without indexation benefit.
DShort-term capital gains taxed at 15%.
💡 As per the Finance Act 2023, for mutual fund units purchased on or after April 1, 2023, where less than 35% of the gross corpus is invested in equity shares of domestic companies (which includes most debt-oriented funds, gold funds, FoFs investing in international funds, etc.), any capital gains arising from their transfer (sale/redemption) are treated as short-term capital gains (STCG) regardless of the holding period. These STCGs are taxed at the investor's applicable income tax slab rate, and the indexation benefit is no longer available for such units.
Q21MCQHardSet-off and Carry Forward of Capital Losses
An investor has a Long-Term Capital Loss (LTCL) of Rs. 60,000 from an equity mutual fund and a Short-Term Capital Loss (STCL) of Rs. 40,000 from a debt mutual fund in the current financial year. They also have a Long-Term Capital Gain (LTCG) of Rs. 50,000 from sale of property and a Short-Term Capital Gain (STCG) of Rs. 70,000 from sale of shares. Which of the following statements regarding set-off of these losses is correct?
AThe LTCL of Rs. 60,000 can be set off against the LTCG of Rs. 50,000, and the remaining Rs. 10,000 LTCL can be set off against STCG.
✓The STCL of Rs. 40,000 can be fully set off against the STCG of Rs. 70,000. The LTCL of Rs. 60,000 can be fully set off against the LTCG of Rs. 50,000, with the remaining Rs. 10,000 LTCL being carried forward.
CThe STCL of Rs. 40,000 can be fully set off against the LTCG of Rs. 50,000. The LTCL of Rs. 60,000 can be set off against STCG of Rs. 70,000.
DThe LTCL of Rs. 60,000 can be set off against the STCG of Rs. 70,000, and the STCL of Rs. 40,000 can be set off against the LTCG of Rs. 50,000.
💡 As per the Income Tax Act, 1961: Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). Long-Term Capital Loss (LTCL) can only be set off against Long-Term Capital Gain (LTCG); it cannot be set off against STCG. In this scenario: 1. STCL of Rs. 40,000 can be fully set off against STCG of Rs. 70,000, leaving a remaining STCG of Rs. 30,000. 2. LTCL of Rs. 60,000 can only be set off against LTCG of Rs. 50,000. This leaves an unadjusted LTCL of Rs. 10,000 (Rs. 60,000 - Rs. 50,000), which cannot be set off against STCG and must be carried forward to subsequent years (up to 8 assessment years) to be set off against future LTCG.
Q22MCQHardGrandfathering Rule for LTCG on Equity
An investor purchased units of an equity-oriented mutual fund on January 1, 2017, for ₹50,000. The Net Asset Value (NAV) of the fund on January 31, 2018, was ₹65,000. The investor sold these units on March 1, 2023, for ₹80,000. What would be the amount of taxable long-term capital gain, considering the grandfathering provision? (Assume no other investments and ignore surcharge/cess).
A₹30,000
✓₹15,000
C₹0 (Nil)
D₹5,000
💡 According to the grandfathering provision for Long Term Capital Gains (LTCG) on equity-oriented funds, for units purchased before February 1, 2018, the cost of acquisition is considered to be the higher of: (1) Actual cost of acquisition (₹50,000) and (2) Fair Market Value (FMV) as on January 31, 2018 (NAV on Jan 31, 2018 is ₹65,000), but not exceeding the sale consideration. In this case, the higher of the actual cost (₹50,000) and FMV on Jan 31, 2018 (₹65,000) is ₹65,000. This becomes the deemed cost of acquisition. LTCG = Sale Price - Deemed Cost of Acquisition = ₹80,000 - ₹65,000 = ₹15,000. This gain would be taxable at 10% as it is long-term and within the ₹1 lakh exemption limit for LTCG on equity funds.
Q23MCQEasyTax benefits and lock-in period for ELSS
What is the minimum lock-in period for investments made in Equity Linked Savings Schemes (ELSS) to avail tax benefits under Section 80C of the Income Tax Act, 1961?
A1 year
✓3 years
C5 years
DNo lock-in period
💡 Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of 3 years from the date of investment for each unit, to qualify for tax deduction benefits under Section 80C of the Income Tax Act, 1961. This is the shortest lock-in period among all Section 80C investment options.
Q24MCQMediumTaxation of Gold ETFs and non-equity oriented funds
An investor invests in a Gold Exchange Traded Fund (ETF) and redeems it after 20 months. How will the capital gains arising from this redemption be taxed?
AAs Short Term Capital Gains (STCG) at a flat rate of 15%.
BAs Long Term Capital Gains (LTCG) at a flat rate of 10% on gains exceeding ₹1 lakh.
✓As Short Term Capital Gains (STCG) as per the investor's income tax slab.
DAs Long Term Capital Gains (LTCG) at 20% with the benefit of indexation.
💡 Gold ETFs are treated as non-equity oriented funds for taxation purposes. Since the holding period is less than 36 months (20 months), the gains are classified as Short Term Capital Gains (STCG) and are taxed as per the investor's applicable income tax slab rate.
Q25MCQEasyELSS features
What is the mandatory lock-in period for investments made in Equity Linked Savings Schemes (ELSS)?
A1 year
✓3 years
C5 years
DNo lock-in period
💡 Equity Linked Savings Schemes (ELSS) come with a mandatory lock-in period of 3 years from the date of investment. This is the shortest lock-in period among all Section 80C tax-saving instruments.
Q26MCQMediumSecurities Transaction Tax (STT)
Securities Transaction Tax (STT) is levied on which of the following transactions related to mutual funds?
APurchase of units of an equity-oriented mutual fund.
BSale of units of a debt-oriented mutual fund.
✓Sale of units of an equity-oriented mutual fund.
DPurchase of units of a gold ETF.
💡 STT is levied only on the sale of units of equity-oriented mutual funds. It is not applicable on purchase transactions or on units of debt funds, Gold ETFs, or Fund of Funds.
Q27MCQEasyTaxation of Specific Schemes - ELSS
What is the mandatory lock-in period for investments made in an Equity Linked Savings Scheme (ELSS)?
A1 year
B2 years
✓3 years
D5 years
💡 Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of 3 years from the date of investment. This is the shortest lock-in period among all tax-saving instruments eligible for deduction under Section 80C of the Income Tax Act.
Q28MCQMediumTaxation of International Funds and Fund of Funds
A mutual fund scheme that primarily invests in units of an overseas equity-oriented mutual fund is treated as what for Indian income tax purposes?
AAn equity-oriented fund, if the underlying overseas fund is equity-oriented.
✓A non-equity oriented fund (debt fund), regardless of the underlying overseas fund's asset allocation.
CA hybrid fund, with taxation depending on the average asset allocation.
DA special category fund, with specific tax rules notified by the CBDT.
💡 For Indian income tax purposes, a Fund of Funds (FoF) that invests in overseas funds (even if the underlying overseas fund is equity-oriented) is treated as a non-equity oriented fund (i.e., a debt fund). This means capital gains are taxed as per debt fund rules: Short-Term Capital Gains (STCG) at slab rates, and Long-Term Capital Gains (LTCG) at 20% with indexation benefit (if held for more than 36 months).
Q29MCQMediumTaxation for Non-Resident Indians (NRIs)
What is the applicable Tax Deducted at Source (TDS) rate on Long Term Capital Gains (LTCG) for a Non-Resident Indian (NRI) investor arising from the redemption of units of a non-equity oriented mutual fund?
A10% (without indexation)
B15% (without indexation)
✓20% (with indexation)
D30% (without indexation)
💡 As per income tax provisions, for a Non-Resident Indian (NRI), Long Term Capital Gains (LTCG) arising from the redemption of units of a non-equity oriented mutual fund are subject to TDS at 20% with the benefit of indexation.
Q30MCQHardTaxation of Fund of Funds (FoF)
A resident individual invests in a domestic Fund of Funds (FoF) that primarily invests in units of an overseas equity ETF. How would long-term capital gains (LTCG) from the redemption of this FoF be taxed?
A10% without indexation if gains exceed ₹1 lakh
B15% without indexation
✓20% with indexation if held for more than 3 years
DTaxed as per slab rate if held for less than 3 years
💡 Fund of Funds (FoFs) are generally treated as non-equity oriented funds for taxation purposes, irrespective of their underlying investments, unless they directly invest at least 65% in Indian listed equities. Since this FoF invests in an overseas equity ETF, it is considered a non-equity oriented fund. For non-equity funds, long-term capital gains (LTCG) are realized if units are held for more than 36 months (3 years) and are taxed at 20% after availing the benefit of indexation.
Q31MCQEasyTaxation of Dividends - Debt Funds
How are dividends received from a debt-oriented mutual fund taxed in the hands of a resident individual investor in India?
AExempt from tax.
✓Taxable as 'Income from Other Sources' as per the investor's applicable income tax slab.
CTaxable at a flat rate of 10% after exceeding a threshold of INR 1 lakh.
DTaxable at 20% with indexation benefit.
💡 As per the changes introduced in the Union Budget 2020, effective from April 1, 2020, the Dividend Distribution Tax (DDT) on mutual funds was abolished. Consequently, dividends received from all mutual funds (including debt-oriented funds) are now taxable in the hands of the investor as 'Income from Other Sources' and are added to their total income, taxed at their applicable slab rates.
Q32MCQHardTaxation of specific fund types (Fund of Funds, Gold Funds) post-Finance Act 2023
An investor redeems units of a Gold ETF Fund of Funds after holding them for 30 months. Assuming the investor falls in the 30% income tax bracket, how would the capital gains from this redemption typically be taxed?
AAs Short Term Capital Gains (STCG) at the investor's marginal tax rate.
BAs Long Term Capital Gains (LTCG) at 10% without indexation.
CAs Long Term Capital Gains (LTCG) at 20% with indexation benefit.
✓As income clubbed with other income and taxed at the investor's marginal tax rate.
💡 As per the Finance Act 2023, effective April 1, 2023, capital gains from 'specified mutual funds' (those investing not more than 35% in equity shares of domestic companies) are taxed as short-term capital gains and are taxable at the investor's marginal income tax rate, irrespective of the holding period. Gold ETF Fund of Funds typically fall into this category. Indexation benefit is no longer available for these funds for investments made on or after April 1, 2023.
Q33MCQMediumTaxation of Fund of Funds - International Equities
An investor redeems units of a Fund of Funds (FoF) that primarily invests in an international equity ETF, after holding them for 20 months. What will be the tax treatment for the capital gains?
AShort Term Capital Gain, taxable at 15%.
BLong Term Capital Gain, taxable at 10% without indexation if above INR 1 lakh.
✓Short Term Capital Gain, taxable as per the investor's applicable income slab rate.
DLong Term Capital Gain, taxable at 20% with indexation benefit.
💡 Fund of Funds (FoFs) that invest in international equities are treated as non-equity oriented funds for taxation purposes, irrespective of their underlying asset class. For non-equity oriented funds, capital gains on units held for 36 months or less are considered Short Term Capital Gains (STCG) and are taxable as per the investor's applicable income tax slab rate. Since the holding period is 20 months (less than 36 months), it will be treated as STCG.
Q34MCQEasyDefinition of Equity Oriented Fund for Taxation
As per income tax provisions, a mutual fund scheme is classified as an 'equity-oriented fund' if it invests a minimum of what percentage of its total proceeds in equity shares of domestic companies?
A50%
✓65%
C75%
D80%
💡 For income tax purposes, a mutual fund scheme is considered 'equity-oriented' if it invests a minimum of 65% of its total proceeds in equity shares of domestic companies. This classification determines the applicable capital gains tax rates (e.g., STCG at 15%, LTCG at 10% over ₹1 lakh).
Q35MCQMediumTaxation of Dividends from Mutual Funds
As per the current income tax provisions (post-Budget 2020), how is dividend income received by an individual investor from an Indian mutual fund taxed?
AIt is tax-free in the hands of the investor, as Dividend Distribution Tax (DDT) is paid by the mutual fund.
✓It is taxable in the hands of the investor at their applicable income tax slab rates.
CIt is subject to a flat 10% tax in the hands of the investor, irrespective of their slab.
DIt is tax-free up to ₹10,000, and then taxable at slab rates.
💡 With effect from April 1, 2020 (FY 2020-21 onwards), Dividend Distribution Tax (DDT) on mutual fund dividends was abolished. Consequently, dividend income from mutual funds is now fully taxable in the hands of the investor at their respective income tax slab rates, similar to other income sources.
Q36MCQHardTaxation of Fund of Funds (FoF)
An investor invests in a domestic Fund of Funds (FoF) scheme whose underlying portfolio consists entirely of units of an Equity Linked Savings Scheme (ELSS). For capital gains taxation purposes, how will the FoF scheme be primarily treated?
AAs an equity-oriented fund, due to the underlying ELSS being equity-oriented.
✓As a debt-oriented fund, as FoFs are generally treated as non-equity funds for tax purposes.
CAs a hybrid fund, with taxation depending on the fund manager's discretion.
DThe taxation will be deferred until the underlying ELSS units are redeemed.
💡 For taxation purposes, Fund of Funds (FoFs) are generally treated as non-equity (debt-oriented) funds, irrespective of the underlying asset class they invest in. This is because they invest in units of other mutual fund schemes, not directly in equity shares. Therefore, capital gains from the redemption of FoF units will be taxed as per debt fund taxation rules (LTCG after 36 months with indexation, STCG at slab rates). The ELSS status of the underlying fund does not pass through for the FoF's own taxation classification.
Q37MCQMediumEquity Linked Savings Scheme (ELSS)
An investor invests ₹2,00,000 in an Equity Linked Savings Scheme (ELSS) fund. What is the maximum deduction allowed under Section 80C for this investment, and what is the mandatory lock-in period for these units?
✓₹1,50,000 deduction, 3 years lock-in.
B₹2,00,000 deduction, 5 years lock-in.
C₹1,50,000 deduction, 1 year lock-in.
DNo deduction, 3 years lock-in.
💡 Investments in ELSS qualify for a deduction under Section 80C of the Income Tax Act, 1961, up to a maximum limit of ₹1,50,000 in a financial year. The units purchased under ELSS have a mandatory lock-in period of 3 years from the date of investment, which is the shortest lock-in period among all Section 80C instruments.
Q38MCQMediumTaxation of Dividends - TDS
After the Finance Act 2020, dividend income received from mutual funds is taxable in the hands of the unitholder. For a resident individual unitholder, what is the current threshold for Tax Deducted at Source (TDS) on such dividend income?
ATDS is applicable at 10% if the dividend income exceeds ₹10,000 in a financial year.
✓TDS is applicable at 10% if the dividend income exceeds ₹5,000 in a financial year.
CNo TDS is applicable for resident individuals on dividend income from mutual funds.
DTDS is applicable at 15% if the dividend income exceeds ₹50,000 in a financial year.
💡 As per the Income Tax Act, after the Finance Act 2020, dividend income from mutual funds is taxable in the hands of the unitholder. For resident individuals, TDS is applicable at 10% if the aggregate dividend income from a mutual fund house exceeds ₹5,000 in a financial year. (Section 194 of the Income Tax Act).
Q39MCQMediumTaxation of Dividends
For an individual investor, how are dividends received from a debt-oriented mutual fund taxed in India for assessment year 2021-22 onwards?
ATax-free in the hands of the investor
BTaxed at a flat rate of 10%
CTaxed at a flat rate of 20%
✓Taxed as per the investor's applicable income tax slab rate
💡 Effective from Assessment Year 2021-22 (financial year 2020-21) onwards, the Dividend Distribution Tax (DDT) has been abolished. Consequently, dividends received from mutual funds, whether equity or debt-oriented, are now taxable in the hands of the investor as 'Income from Other Sources' and are taxed as per their applicable income tax slab rate.
Q40MCQEasySecurities Transaction Tax (STT)
Which of the following mutual fund categories is subject to Securities Transaction Tax (STT) on redemption proceeds?
ADebt-oriented funds
BGold Exchange Traded Funds (ETFs)
CFund of Funds (FoFs) investing in domestic equity funds
✓Equity-oriented funds (with average equity allocation >= 65%)
💡 Securities Transaction Tax (STT) is applicable only on the redemption of units of equity-oriented mutual funds (funds with at least 65% average equity allocation) and on sale of equity shares on a recognized stock exchange. Debt funds, Gold ETFs, and FoFs investing in equity funds (which are treated as non-equity for tax purposes if not directly holding equity) are not subject to STT on redemption.
Q41MCQMediumSecurities Transaction Tax (STT)
An investor redeems units of a domestic Fund of Funds (FoF) which primarily invests in other domestic equity-oriented mutual funds. For capital gains purposes, this FoF is classified as an equity-oriented fund. Will Securities Transaction Tax (STT) be applicable on this redemption?
✓Yes, because the FoF is classified as an equity-oriented fund for taxation purposes.
BNo, because STT is specifically not applicable to Fund of Funds.
CYes, but only if the redemption is processed through a stock exchange platform.
DNo, STT is only applicable on direct equity shares and not on any mutual fund units.
💡 Securities Transaction Tax (STT) is levied on the redemption of units of equity-oriented mutual funds. An FoF is classified as equity-oriented if it invests more than 65% of its average total assets in equity shares of domestic companies. If an FoF meets this criterion and is classified as an equity-oriented fund for capital gains purposes, then STT will be applicable on its redemption, similar to any other equity-oriented mutual fund.
Q42MCQMediumTaxation of Dividends
For a resident individual investor, how are dividends received from mutual funds taxed after April 1, 2020?
ATax-free in the hands of the investor as Dividend Distribution Tax (DDT) is paid by the fund.
BTaxable at a flat rate of 10% for income exceeding ₹10 lakh.
✓Taxable as 'Income from Other Sources' at the investor's applicable slab rates.
DTaxable as Capital Gains, depending on the holding period.
💡 With effect from April 1, 2020 (Assessment Year 2021-22), Dividend Distribution Tax (DDT) was abolished. Dividends received from mutual funds are now taxable in the hands of the investor as 'Income from Other Sources' at their respective income tax slab rates, as per the Income Tax Act.
Q43MCQHardTax Deducted at Source (TDS)
Under which of the following scenarios is a Mutual Fund mandated to deduct Tax Deducted at Source (TDS) for a resident individual investor?
AOn capital gains arising from the sale of units of an equity-oriented fund.
BOn dividend income received from any mutual fund scheme, regardless of the amount.
✓On dividend income exceeding ₹5,000 in a financial year from any mutual fund scheme.
DOn capital gains from the redemption of units of a debt-oriented fund, if the gain exceeds ₹1 lakh.
💡 As per Section 194K of the Income Tax Act, a mutual fund is required to deduct TDS @10% on dividend income exceeding ₹5,000 in a financial year for resident individuals. TDS is generally not applicable on capital gains for resident individuals from mutual funds.
Q44MCQMediumTaxation of Capital Gains - Gold ETFs
Mr. Sharma redeemed his Gold ETF units after holding them for 40 months. What will be the tax treatment for his capital gains?
ALong Term Capital Gain, taxable at 10% without indexation.
✓Long Term Capital Gain, taxable at 20% with indexation benefit.
CShort Term Capital Gain, taxable as per his income slab.
DExempt from tax as it is an investment in physical gold.
💡 Gold ETFs are treated as non-equity oriented funds for taxation purposes. Hence, capital gains on units held for more than 36 months are considered Long Term Capital Gains (LTCG) and are taxable at 20% with the benefit of indexation, as per the Income Tax Act.
Q45MCQMediumTaxation of NRIs - Capital Gains
An NRI investor redeems units of a debt-oriented mutual fund after holding them for 24 months. What would be the applicable TDS rate on the capital gains for this investor?
A15%
B20% with indexation benefit
✓30% plus applicable surcharge and cess
D10% for gains exceeding ₹1 lakh
💡 For debt-oriented mutual funds, a holding period of 24 months results in Short-Term Capital Gains (STCG). For Non-Resident Indian (NRI) investors, STCG from non-equity mutual funds is subject to a TDS rate of 30% plus applicable surcharge and cess, as per the Income Tax Act.
Q46MCQEasyTax Saving Schemes (ELSS)
Which of the following statements is true regarding the lock-in period for Equity Linked Savings Scheme (ELSS) funds?
AThe lock-in period is 5 years from the date of investment.
✓The lock-in period is 3 years from the date of investment, and redemptions can be made on a FIFO (First-In, First-Out) basis.
CThe lock-in period is 3 years from the date of investment, and redemptions can only be made after all units across all folios complete their respective lock-in periods.
DThere is no lock-in period for ELSS funds; they are treated like any other open-ended equity fund.
💡 ELSS funds have a statutory lock-in period of 3 years from the date of allotment of units. This lock-in applies to each purchase separately. When units are purchased at different times (e.g., through an SIP), each instalment has its own 3-year lock-in. Redemption is allowed on a First-In, First-Out (FIFO) basis, meaning the units that completed their 3-year lock-in period first are eligible for redemption first.
Q47MCQEasySecurities Transaction Tax (STT)
Securities Transaction Tax (STT) is a direct tax levied on specific transactions. In the context of mutual funds, on which of the following transactions is STT applicable?
AOn the purchase of units of an equity-oriented mutual fund.
BOn the redemption of units of a debt-oriented mutual fund.
COn the switch from a debt fund to an equity fund.
✓On the redemption of units of an equity-oriented mutual fund.
💡 Securities Transaction Tax (STT) is levied on the sale (which includes redemption) of units of equity-oriented mutual funds. It is not applicable on the purchase of units, nor on any transactions involving debt-oriented mutual funds. (Section 98 of the Finance (No. 2) Act, 2004).
Q48MCQEasySecurities Transaction Tax (STT)
Which of the following transactions in mutual funds is subject to Securities Transaction Tax (STT)?
APurchase of units of an equity-oriented mutual fund.
BRedemption of units of a debt-oriented mutual fund.
CPurchase of units of a debt-oriented mutual fund.
✓Redemption of units of an equity-oriented mutual fund.
💡 Securities Transaction Tax (STT) is levied on the sale (redemption or switch-out) of units of an equity-oriented mutual fund. It is not applicable on the purchase of mutual fund units or on transactions involving debt-oriented mutual funds.
Q49MCQMediumTaxation of dividend income (post-DDT abolition)
For a resident individual investor, how is dividend income received from an equity-oriented mutual fund scheme taxed in the current financial year (post-FY 2020-21)?
AIt is exempt from tax in the hands of the investor.
BIt is taxed at a flat rate of 10% in the hands of the investor.
✓It is added to the investor's total income and taxed as 'Income from Other Sources' as per applicable slab rates.
DIt is subject to Dividend Distribution Tax (DDT) by the mutual fund before distribution.
💡 As per the Union Budget 2020, Dividend Distribution Tax (DDT) on mutual funds was abolished. Consequently, dividend income received from mutual fund schemes (both equity and debt) is now taxable in the hands of the investor. It is added to the investor's total income and taxed under the head 'Income from Other Sources' as per the individual's applicable income tax slab rates.
Q50MCQMediumTDS for NRIs on long-term capital gains from equity funds
For Non-Resident Indian (NRI) investors, what is the general TDS (Tax Deducted at Source) rate on long-term capital gains from the sale of equity-oriented mutual fund units where STT has been paid?
✓10% (without surcharge and cess) on gains exceeding ₹1 lakh.
B15% (without surcharge and cess) on the entire gain.
C20% (without indexation benefit) on the entire gain.
DNo TDS, as LTCG from equity funds are exempt up to ₹1 lakh.
💡 For Non-Resident Indian (NRI) investors, long-term capital gains (LTCG) arising from the sale of equity-oriented mutual fund units where Securities Transaction Tax (STT) has been paid are taxable at 10% on gains exceeding ₹1 lakh, as per Section 112A of the Income Tax Act, 1961. Tax Deducted at Source (TDS) provisions apply to such gains for NRIs at this rate.
Q51MCQMediumTDS on dividend income for resident individuals
For a resident individual investor, what is the current Tax Deducted at Source (TDS) implication on dividend income received from a mutual fund scheme?
A10% TDS if the dividend income exceeds ₹5,000 in a financial year.
B10% TDS if the dividend income exceeds ₹10,000 in a financial year.
C7.5% TDS if the dividend income exceeds ₹5,000 in a financial year.
✓No TDS is applicable on dividend income paid to resident individuals by mutual funds.
💡 As per current income tax provisions (post Union Budget 2020), mutual funds are not required to deduct TDS on dividend income paid to resident individual unitholders. The dividend income is fully taxable in the hands of the investor as 'Income from Other Sources' at their applicable slab rates. TDS provisions for certain other entities or Non-Resident Indians (NRIs) might differ.
Q52MCQMediumCapital Gains Taxation - Debt Funds
For units of a debt-oriented mutual fund to qualify for long-term capital gains (LTCG) treatment with indexation benefit, they must be held for a period exceeding:
A12 months
B24 months
✓36 months
D60 months
💡 As per the Income Tax Act, units of a debt-oriented mutual fund are considered long-term capital assets if held for more than 36 months. For such gains, investors can avail the benefit of indexation and pay tax at 20% plus applicable surcharge and cess. Equity-oriented funds have a 12-month holding period for LTCG.
Q53MCQEasyTax planning with ELSS
What is the mandatory lock-in period for investments made in Equity Linked Savings Schemes (ELSS) to avail tax benefits under Section 80C of the Income Tax Act, 1961?
A1 year
B2 years
✓3 years
D5 years
💡 Equity Linked Savings Schemes (ELSS) have a mandatory lock-in period of 3 years from the date of investment. This is the shortest lock-in period among all Section 80C investment options, making them attractive for tax planning.
Q54MCQHardTaxation for Non-Resident Indians (NRIs) - Capital Gains
For a Non-Resident Indian (NRI) investor, what is the applicable Tax Deducted at Source (TDS) rate on Long Term Capital Gains (LTCG) from the sale of equity-oriented mutual fund units exceeding ₹1 lakh in a financial year?
A15% (plus applicable surcharge and cess).
✓10% (plus applicable surcharge and cess).
C20% (plus applicable surcharge and cess) with indexation benefit.
D30% (plus applicable surcharge and cess).
💡 Long Term Capital Gains (LTCG) from equity-oriented mutual funds are taxed at 10% (plus surcharge and cess) on gains exceeding ₹1 lakh in a financial year, as per Section 112A of the Income Tax Act. This rate is applicable to both resident and non-resident investors. TDS is deducted at this rate for NRIs on the taxable portion of LTCG.
Q55MCQEasySecurities Transaction Tax (STT)
Which of the following transactions involving mutual fund units is subject to Securities Transaction Tax (STT) in India?
APurchase of units of an equity-oriented mutual fund.
BRedemption of units of a debt mutual fund.
✓Redemption of units of an equity-oriented mutual fund.
DPurchase of units of a gold exchange-traded fund (ETF).
💡 Securities Transaction Tax (STT) is levied only on the sale or redemption of units of equity-oriented mutual funds. It is not applicable on the purchase of units or on any transactions involving debt-oriented mutual funds or Gold ETFs.
Q56MCQMediumTaxation of International Funds (Post-April 1, 2023)
An Indian resident invests in a Mutual Fund Scheme that primarily invests in equities of companies listed on foreign exchanges (an International Fund). If the units were purchased on or after April 1, 2023, how will any capital gains from such a fund be taxed?
AAs equity-oriented funds, with LTCG taxed at 10% on gains exceeding INR 1 lakh.
BAs debt-oriented funds, with LTCG taxed at 20% with indexation benefit for holding period over 3 years.
✓As short-term capital gains (STCG) at the investor's marginal income tax slab rate, irrespective of the holding period.
DEntirely exempt from tax as the investments are made in foreign markets.
💡 For tax purposes, International Funds are treated as non-equity oriented funds. As per the Finance Act 2023, for units of non-equity oriented funds purchased on or after April 1, 2023, all capital gains, irrespective of the holding period, are treated as short-term capital gains and taxed at the investor's marginal income tax slab rate, without indexation benefit.
Q57MCQHardTaxation of Sovereign Gold Bonds (SGBs)
Which of the following statements regarding the taxation of Sovereign Gold Bonds (SGBs) for a resident individual is INCORRECT?
AThe interest received on SGBs is taxable at the investor's applicable income tax slab rates.
BCapital gains arising from the redemption of SGBs on maturity are fully exempt from income tax.
✓Long-term capital gains arising from the transfer of SGBs before maturity are taxed at 10% without indexation benefit, if held for more than 36 months.
DShort-term capital gains arising from the transfer of SGBs are taxed at the investor's applicable income tax slab rates.
💡 Long-term capital gains arising from the transfer of SGBs before maturity (i.e., not on maturity) are taxed at 20% with the benefit of indexation, if held for more than 36 months (3 years). The 10% without indexation is typically for equity-oriented funds under Section 112A (on gains exceeding ₹1 lakh) or for unlisted shares/zero coupon bonds in specific conditions under Section 112, but not for SGBs transferred.
Q58MCQMediumTaxation of Debt Mutual Funds (post April 1, 2023)
An investor purchases units of a debt mutual fund on May 15, 2023. If they redeem these units after holding them for 24 months, how will the capital gains be taxed?
AAs long-term capital gains at 20% with indexation benefit.
BAs short-term capital gains at 15% as per Section 111A.
✓As income at the investor's applicable income tax slab rates, irrespective of the holding period.
DExempt from capital gains tax if held for more than 12 months.
💡 For debt mutual fund units purchased on or after April 1, 2023, all capital gains, irrespective of the holding period, are treated as 'short-term' and taxed at the investor's applicable income tax slab rates. The benefit of indexation for long-term capital gains on debt funds is no longer available for such units.
Q59MCQHardTaxation of Systematic Withdrawal Plan (SWP)
An investor uses a Systematic Withdrawal Plan (SWP) from a debt-oriented mutual fund. How is each withdrawal treated for tax purposes?
AThe entire withdrawal amount is considered as capital gains.
✓The withdrawal is treated as a redemption, with only the capital gains portion being taxable.
CThe withdrawal is exempt from tax until the original investment amount is recovered.
DIt is taxed as income from other sources at the investor's marginal tax rate.
💡 In a Systematic Withdrawal Plan (SWP), each withdrawal is treated as a redemption of mutual fund units. Therefore, a portion of the withdrawal represents the original capital invested, and the remaining portion is considered capital gains. Only the capital gains portion is subject to tax, classified as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG) depending on the holding period of the units redeemed and the type of fund.
Q60MCQHardTaxation of Gifts and Capital Gains
Mr. A receives mutual fund units as a gift from his friend, Mr. B, on July 1, 2023. The Fair Market Value (FMV) of these units on the date of gift is INR 80,000. Mr. A subsequently redeems these units on January 15, 2024, for INR 95,000. Assuming the fund is a non-equity fund and Mr. A's income is taxable at the highest slab rate, what are the tax implications for Mr. A?
✓Mr. A is liable to pay tax on INR 80,000 under 'Income from Other Sources' and capital gains tax on INR 15,000 (95,000 - 80,000).
BMr. A is liable to pay tax on INR 30,000 (80,000 - 50,000) under 'Income from Other Sources', and capital gains tax on INR 15,000 (95,000 - 80,000).
CMr. A is not liable to pay any tax on the gift, but liable to pay capital gains tax on INR 15,000.
DMr. A is liable to pay tax on INR 80,000 under 'Income from Other Sources' and no capital gains tax.
💡 Under Section 56(2)(x) of the Income Tax Act, 1961, if any person receives any property (including mutual fund units) from a non-relative without consideration, and the aggregate fair market value of such property exceeds INR 50,000, the whole of such aggregate fair market value is taxable as 'Income from Other Sources'. Here, INR 80,000 is received from a friend (non-relative), exceeding INR 50,000, so the entire INR 80,000 is taxable as 'Income from Other Sources'. For capital gains, the cost of acquisition for the recipient (Mr. A) is the FMV on the date of gift (i.e., INR 80,000). The redemption value is INR 95,000. The holding period is from July 1, 2023, to January 15, 2024, which is less than 36 months. Assuming it's a non-equity fund, this results in Short-Term Capital Gains (STCG) of INR 15,000 (95,000 - 80,000), taxable at Mr. A's applicable income tax slab rate.
Q61MCQMediumTaxation of Fund of Funds investing in international equity
How are capital gains from a Fund of Funds (FoF) that invests predominantly in units of an overseas equity fund taxed in India?
AAs equity-oriented funds, subject to Securities Transaction Tax (STT).
✓As debt-oriented funds, with indexation benefits for long-term capital gains.
CAs hybrid funds, with specific rules depending on domestic equity exposure.
DExempt from capital gains tax as the underlying assets are foreign.
💡 Funds of Funds (FoFs) that invest predominantly in units of overseas equity funds are not classified as 'equity-oriented funds' for Indian tax purposes. They are treated similar to non-equity oriented funds (like debt funds). Therefore, long-term capital gains (holding period > 36 months) are taxed at 20% with indexation benefits, and short-term capital gains (holding period <= 36 months) are taxed at the investor's marginal income tax rate. STT is not applicable.
Q62MCQEasyIndexation Benefit
The primary purpose of providing indexation benefit for long-term capital gains on certain mutual fund units is to:
AReduce the Securities Transaction Tax (STT) payable by the investor.
✓Adjust the purchase cost for inflation, thereby reducing the taxable capital gain.
CEncourage investors to invest in equity-oriented mutual funds.
DProvide a fixed deduction from the total capital gain irrespective of inflation.
💡 Indexation benefit allows the investor to adjust the cost of acquisition of an asset for inflation over the holding period, using the Cost Inflation Index (CII). This inflated cost reduces the taxable long-term capital gain, making the tax liability more equitable by accounting for the erosion of purchasing power due to inflation.
An investor held units of a debt-oriented mutual fund for 4 years and sold them, realizing a capital gain. For tax purposes, how will this gain be treated?
AAs short-term capital gain, taxed at the investor's slab rate.
BAs long-term capital gain, taxed at 15% without indexation.
✓As long-term capital gain, taxed at 20% with the benefit of indexation.
DAs long-term capital gain, fully exempt from tax up to ₹1 lakh.
💡 For debt-oriented mutual funds, a holding period of more than 36 months (3 years) qualifies the gains as long-term capital gains. These are taxed at 20% after providing the benefit of indexation, as per Section 112 of the Income Tax Act.
Q64MCQHardNRI Taxation, TDS on Debt LTCG
A Non-Resident Indian (NRI) redeems units of a debt-oriented mutual fund after holding them for 40 months. What is the applicable Tax Deducted at Source (TDS) rate on the Long Term Capital Gains (LTCG) for such an investment?
A10%
B15%
✓20%
D30%
💡 For Non-Resident Indians (NRIs), Long Term Capital Gains (LTCG) arising from the redemption of debt-oriented mutual funds (held for more than 36 months) are taxed at a rate of 20% with the benefit of indexation. The Tax Deducted at Source (TDS) on such LTCG for NRIs is 20% as per Section 194LBA of the Income Tax Act.
Q65MCQMediumSecurities Transaction Tax (STT)
Securities Transaction Tax (STT) is levied on which of the following transactions related to mutual funds?
APurchase of units of a debt-oriented mutual fund.
✓Redemption of units of an equity-oriented mutual fund.
CPurchase of units of a gold ETF.
DSwitching from a liquid fund to an equity fund (considering the entire switch transaction).
💡 STT is levied on transactions involving equity-oriented mutual funds. Specifically, it is levied on the purchase and redemption of equity-oriented mutual fund units. It is not applicable to debt funds, gold ETFs, or other non-equity funds. While the purchase leg of a switch into an equity fund would attract STT, option 'b' describes a direct transaction that unequivocally attracts STT.
Q66MCQHardTax implications of Inter-scheme Transfers
An investor decides to switch units from an equity fund (Scheme A) to a debt fund (Scheme B) within the same fund house. What are the tax implications of this transaction?
AThe switch is considered a non-taxable event as it occurs within the same fund house.
✓Capital gains or losses will be triggered in Scheme A, and Scheme B will be treated as a fresh purchase.
COnly a Short Term Capital Gain (STCG) will be applicable, irrespective of the holding period in Scheme A.
DThe cost of acquisition for Scheme B units will be the original cost of acquisition from Scheme A, carrying forward the holding period.
💡 A switch transaction (inter-scheme transfer) is treated as a redemption from the source scheme (Scheme A) and a fresh purchase in the target scheme (Scheme B). This means that any capital gains or losses accrued on the units of Scheme A up to the date of the switch will be realized and become taxable in the investor's hands. The holding period for Scheme B units starts afresh from the date of the switch.
Q67MCQMediumTaxation of Fund of Funds (FoF)
How are capital gains from a Fund of Funds (FoF) scheme taxed in India, irrespective of the underlying assets it invests in?
AAlways treated as equity funds for taxation purposes.
✓Always treated as debt funds for taxation purposes.
CTaxation depends on the equity exposure of the underlying funds in which the FoF invests.
DExempt from capital gains tax if held for more than 36 months.
💡 As per income tax regulations, Fund of Funds (FoF) schemes are always treated as debt funds for taxation purposes, irrespective of the asset allocation of their underlying schemes. This means capital gains are taxed as per debt fund rules.
Q68MCQHardTaxation of Fund of Funds (FoF)
An investor invests in a domestic Fund of Funds (FoF) whose underlying scheme is an equity-oriented mutual fund. If the investor redeems the FoF units after 24 months, how will the capital gains be taxed?
AAs Long-Term Capital Gains (LTCG) at 10% for gains exceeding ₹1 lakh, without indexation.
BAs Short-Term Capital Gains (STCG) at 15%.
✓As Short-Term Capital Gains (STCG) at the investor's applicable income tax slab rates.
DAs Long-Term Capital Gains (LTCG) at 20% with indexation benefit.
💡 For income tax purposes, a domestic Fund of Funds (FoF) is always treated as a 'non-equity oriented fund,' irrespective of the underlying asset allocation of its target schemes. For non-equity oriented funds, the holding period for Long-Term Capital Gains (LTCG) is more than 36 months. Since the units are redeemed after 24 months, the gains are classified as Short-Term Capital Gains (STCG) and are taxed at the investor's applicable income tax slab rates.
Q69MCQEasyTaxation of Dividends - Post-Budget 2020 Changes
Prior to April 1, 2020, dividends from equity-oriented mutual funds were subject to Dividend Distribution Tax (DDT) at the fund house level. How are such dividends treated in the hands of the investor post-April 1, 2020?
AThey remain tax-exempt in the hands of the investor.
BThey are taxed at a flat rate of 10% for all investors.
✓They are taxed at the investor's applicable income tax slab rates.
DThey are subject to a fixed TDS of 10% irrespective of investor income.
💡 With effect from April 1, 2020 (FY 2020-21), Dividend Distribution Tax (DDT) has been abolished. Consequently, dividends received from mutual funds are now taxable in the hands of the investor at their respective income tax slab rates, similar to other income.
Q70MCQEasyDefinition of Equity-Oriented Fund
For taxation purposes under the Indian Income Tax Act, what is the minimum equity exposure required for a mutual fund scheme to be classified as an 'equity-oriented fund'?
AAt least 50% of its total portfolio invested in equity shares of domestic companies.
✓At least 65% of its total portfolio invested in equity shares of domestic companies.
CAt least 75% of its total portfolio invested in equity shares of domestic companies.
DAt least 80% of its total portfolio invested in equity and equity-related instruments, including foreign equities.
💡 As per Section 112A and 111A of the Income Tax Act, 1961, an 'equity-oriented fund' is defined as a fund where the investible funds are invested in equity shares of domestic companies to the extent of more than 65% of the total proceeds of such fund. This classification determines the applicable capital gains tax treatment.
Q71MCQHardTaxation of Debt Mutual Funds (Post-April 1, 2023)
An investor purchased units of a debt mutual fund on May 15, 2023, and redeemed them on June 20, 2025. How will the capital gains arising from this redemption be taxed for the investor?
AAs Long Term Capital Gains (LTCG) at 20% with indexation benefit.
✓As Short Term Capital Gains (STCG) at the investor's marginal income tax slab rate, without indexation benefit.
CAs LTCG at 10% without indexation benefit, if gains exceed INR 1 lakh.
DAs STCG at 15% without indexation benefit.
💡 As per the Finance Act 2023, for debt mutual fund units purchased on or after April 1, 2023, any capital gains, irrespective of the holding period, are treated as short-term capital gains and taxed at the investor's marginal income tax slab rate, with no benefit of indexation.
Q72MCQMediumTaxation of Debt Funds
Mr. Sharma invested in a debt mutual fund and held the units for 45 months before redemption. Which of the following statements correctly describes the tax treatment of the capital gains arising from this redemption?
AThe gains will be treated as Short Term Capital Gains (STCG) and taxed at his individual slab rate.
BThe gains will be treated as Long Term Capital Gains (LTCG) and taxed at 10% without indexation benefit.
✓The gains will be treated as Long Term Capital Gains (LTCG) and taxed at 20% after availing indexation benefit.
DThe gains will be treated as Short Term Capital Gains (STCG) and taxed at a flat rate of 15%.
💡 For debt mutual funds, units held for more than 36 months are classified as Long Term Capital Assets. The capital gains arising from the sale of such units are treated as Long Term Capital Gains (LTCG) and are taxed at a rate of 20% after availing the benefit of indexation.
Q73MCQMediumTaxation of Systematic Withdrawal Plan (SWP)
When an investor opts for a Systematic Withdrawal Plan (SWP) from a mutual fund scheme, how is each withdrawal treated for taxation purposes?
AThe entire withdrawal amount is treated as dividend income and taxed at the investor's slab rate.
BThe entire withdrawal amount is considered a return of capital and is tax-free.
✓Each withdrawal is treated as a redemption, and only the capital gains component (if any) is subject to tax.
DEach withdrawal is treated as interest income and taxed at a flat rate of 10%.
💡 A Systematic Withdrawal Plan (SWP) involves periodic redemption of units from a mutual fund scheme. Therefore, each withdrawal is treated as a redemption. The initial investment amount (cost of acquisition) is considered a return of capital and is tax-free, while any gain over this cost (capital gain) is subject to tax as per the applicable capital gains rules (Short Term Capital Gains or Long Term Capital Gains, depending on the fund type and holding period).
Q74MCQMediumSet-off and Carry Forward of Capital Losses
An investor incurs a Short-Term Capital Loss (STCL) of ₹50,000 from the sale of debt mutual fund units and a Long-Term Capital Gain (LTCG) of ₹1,20,000 from the sale of equity mutual fund units in the same financial year. Which of the following statements regarding the set-off of this loss is correct?
AThe STCL cannot be set off against LTCG from equity funds.
✓The STCL can be fully set off against the LTCG, reducing the taxable LTCG to ₹70,000.
CThe STCL can only be set off against Short-Term Capital Gains.
DThe STCL can be carried forward for 8 years but cannot be set off in the current year.
💡 As per income tax rules, a Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Therefore, the STCL of ₹50,000 can be fully set off against the LTCG of ₹1,20,000, leaving a taxable LTCG of ₹70,000.
Q75MCQMediumTaxation of specific fund types (FoF)
For a resident individual investor, how are capital gains from a domestic Fund of Funds (FoF) that invests exclusively in domestic equity schemes taxed?
ASTCG at 15%; LTCG at 10% for gains over ₹1 lakh.
✓STCG as per slab rate; LTCG at 20% with indexation.
CSTCG as per slab rate; LTCG exempt up to ₹1 lakh.
DSTCG at 15%; LTCG at 20% with indexation.
💡 Fund of Funds (FoFs), regardless of their underlying asset class (equity or debt), are treated as non-equity oriented funds (similar to debt funds) for taxation purposes. Therefore, Short Term Capital Gains (STCG) are taxed as per the investor's income tax slab rate, and Long Term Capital Gains (LTCG) (holding period over 36 months) are taxed at 20% with the benefit of indexation.
Q76MCQMediumIndexation Benefit
For a resident individual investor, the benefit of indexation for calculating long-term capital gains is available for which of the following mutual fund categories?
AEquity-oriented mutual funds.
BEquity-Linked Savings Schemes (ELSS).
✓Debt-oriented mutual funds.
DArbitrage funds.
💡 Indexation benefit is available for long-term capital gains arising from the sale of units of debt-oriented mutual funds. Equity-oriented funds (including ELSS and Arbitrage funds, which are typically treated as equity-oriented for tax purposes) do not get indexation benefit for LTCG. LTCG on equity funds is taxed at 10% on gains exceeding ₹1 lakh without indexation.
Q77MCQMediumTaxation of Fund of Funds (FoFs)
A mutual fund scheme invests predominantly in units of other mutual fund schemes (a Fund of Funds or FoF). For taxation purposes, how are the capital gains from such an FoF treated, irrespective of the underlying asset class of the target funds?
AAlways treated as equity-oriented funds if the underlying funds are equity-oriented.
✓Always treated as debt-oriented funds.
CTreated as per the weighted average equity exposure of the underlying funds.
DExempt from capital gains tax if held for more than 12 months.
💡 As per income tax regulations, any Fund of Funds (FoF), irrespective of the asset allocation of the underlying schemes it invests in, is always treated as a debt-oriented fund for capital gains taxation purposes. This implies that long-term capital gains (holding period > 3 years) are taxed at 20% with indexation, and short-term capital gains (holding period <= 3 years) are taxed at the investor's slab rate.
Q78MCQMediumTaxation of Dividends for NRIs
What is the general TDS rate applicable on dividend income distributed by a mutual fund to a Non-Resident Indian (NRI) investor?
A10%
B15%
✓20%
D30%
💡 As per the Income Tax Act, dividend income distributed by mutual funds to Non-Resident Indian (NRI) investors is generally subject to Tax Deducted at Source (TDS) at the rate of 20% (plus applicable surcharge and cess), unless a lower rate is specified under a Double Taxation Avoidance Agreement (DTAA). For resident individuals, TDS is not applicable up to a certain limit.
Q79MCQMediumSet-off and Carry Forward of Capital Losses
An investor incurs a Long Term Capital Loss (LTCL) from the sale of debt mutual fund units. Which of the following statements regarding the set-off and carry forward of this loss is correct?
AThe LTCL from debt funds can be set off against any capital gains (both short-term and long-term) from any asset class.
✓The LTCL from debt funds can only be set off against Long Term Capital Gains (LTCG) from any other asset class and can be carried forward for 8 assessment years.
CThe LTCL from debt funds can only be set off against LTCG from debt funds and cannot be carried forward.
DThe LTCL from debt funds can be set off against STCG from equity funds but cannot be carried forward.
💡 A Long Term Capital Loss (LTCL) can only be set off against a Long Term Capital Gain (LTCG). It cannot be set off against Short Term Capital Gain (STCG). If not fully set off in the current year, it can be carried forward for up to 8 subsequent assessment years and set off against LTCG in those years. This rule applies irrespective of the asset class from which the LTCG arises.
Q80MCQHardTaxation of Debt Oriented Mutual Funds - Capital Gains
For debt-oriented mutual funds, the benefit of indexation for calculating long-term capital gains is available if the units are held for a period exceeding:
A12 months
B24 months
✓36 months
D60 months
💡 As per income tax regulations, for debt-oriented mutual funds, an investment is considered long-term if held for more than 36 months. Long-Term Capital Gains (LTCG) arising from such investments are taxed at a flat rate of 20% after factoring in the benefit of indexation. For investments held for 36 months or less, they are treated as Short-Term Capital Gains (STCG) and taxed at the investor's applicable slab rate.
About this content: These practice questions are based on the
NISM-Series-VA: Mutual Fund Distributors Certification Examination Workbook
published by the National Institute of Securities Markets (NISM), Mumbai.
NISM is a SEBI-established institution. Questions cover Taxation with verified answers and explanations.
BullWiser is an independent exam preparation platform — not affiliated with NISM, SEBI or AMFI.
Last updated: .
NISM SERIES V-A MOCK TEST — FREE
Most candidates guess their way through V-A. BullWiser makes you prove it.
120 min. 100 MCQs. Negative marking. Chapter-wise weak area report. 2 free attempts.