NISM Series V-A Chapter 8: Taxation Practice Questions

Question 1

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'?

Accepted Answer

65%. 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.

Question 2

Securities Transaction Tax (STT) is levied on which of the following transactions related to mutual funds?

Accepted Answer

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.

Question 3

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?

Accepted Answer

20%. STCG on equity-oriented fund units (held 12 months or less) is taxed at 20% for redemptions from 23 July 2024 (earlier 15%). For an NRI, TDS is deducted at this Income-tax Act rate (plus surcharge and cess) unless a lower DTAA rate applies.

Question 4

Under current rules, how are capital gains from units of a Gold Exchange Traded Fund (ETF) taxed?

Accepted Answer

STCG at slab rate; LTCG at 12.5% without indexation if held for more than 12 months.. Gold ETFs are taxed with STCG at slab rate and LTCG at 12.5% without indexation, with LTCG arising after 12 months. The earlier treatment (20% with indexation after 36 months) no longer applies, and slab-rate-regardless-of-holding applies to debt-oriented funds, not Gold ETFs.

Question 5

At what rate are short-term capital gains on redemption of equity-oriented fund units taxed, for units redeemed on or after 23 July 2024?

Accepted Answer

20%. STCG on equity-oriented fund units (held up to 12 months) is taxed at 20% for redemptions on or after 23 July 2024; earlier it was 15%.

Question 6

Which of the following transactions related to mutual funds attracts Securities Transaction Tax (STT)?

Accepted Answer

Sale of units of an equity-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.

Question 7

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?

Accepted Answer

Only against Long-Term Capital Gains (LTCG) from any capital asset.. 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).

Question 8

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?

Accepted Answer

TDS at 20% on the entire ₹2,00,000 capital gain.. Units of an equity-oriented fund held for 12 months or less give STCG, taxed at 20% for redemptions from 23 July 2024 (earlier 15%). For an NRI, TDS is deducted at the Income-tax Act rate (absent a lower DTAA rate), i.e. 20% plus surcharge and cess on the full ₹2,00,000; the ₹1.25 lakh exemption applies only to LTCG.

Question 9

For a non-equity-oriented mutual fund other than a debt-oriented fund (e.g. a Fund of Funds or an international fund), what is the minimum holding period for gains to be long-term, and how is LTCG taxed?

Accepted Answer

More than 24 months; 12.5% without indexation.. There are now only two holding periods: 12 months for listed securities and equity-oriented fund units, and 24 months for all other assets. FoFs and international funds therefore give LTCG after 24 months, taxed at 12.5% without indexation (earlier 36 months with indexation).

Question 10

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?

Accepted Answer

As short-term capital gains at the investor's slab rate if held for 24 months or less, and long-term capital gains at 12.5% without indexation if held for more than 24 months.. An FoF investing in an international ETF is not equity-oriented for Indian tax, so it falls under 'other' mutual funds: STCG at the slab rate and LTCG at 12.5% without indexation after 24 months. The earlier 36-month holding period with 20% indexed LTCG no longer applies, and the 20%/12.5%-with-exemption treatment is only for equity-oriented funds.

Question 11

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?

Accepted Answer

Rs. 120 (FMV as on Jan 31, 2018).. 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.

Question 12

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?

Accepted Answer

65%. 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.

Question 13

What is the rate of TDS on IDCW (dividend) paid by a mutual fund to a resident individual, if the dividend exceeds Rs 10,000 in a financial year?

Accepted Answer

10%. Where IDCW (dividend) paid to a resident investor exceeds Rs 10,000 in a year, the mutual fund deducts TDS at 10%. IDCW is taxable in the investor's hands at slab rate since DDT was abolished from April 2020.

Question 14

Under which of the following scenarios is Securities Transaction Tax (STT) typically levied on mutual fund transactions?

Accepted Answer

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.

Question 15

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?

Accepted Answer

₹1,500. 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).

Question 16

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:

Accepted Answer

Average gross equity asset allocation during the financial year is 65% or more.. 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.

Question 17

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?

Accepted Answer

Short-term capital gains taxed at the investor's applicable income tax slab rate.. 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.

Question 18

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?

Accepted Answer

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.. 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.

Question 19

An investor purchased units of an equity-oriented mutual fund on January 1, 2017, for ₹50,000. The NAV value of these units on January 31, 2018, was ₹65,000. The investor sold the units on March 1, 2023, for ₹80,000. Applying the grandfathering provision, what is the amount of long-term capital gain (before considering the annual LTCG exemption)?

Accepted Answer

₹15,000. Under grandfathering, cost of acquisition is the higher of actual cost (₹50,000) and NAV value on 31 January 2018 (₹65,000), i.e. ₹65,000, so LTCG = ₹80,000 − ₹65,000 = ₹15,000. Since this is within the annual LTCG exemption (₹1 lakh then; ₹1.25 lakh now), no tax would actually be payable if there were no other gains.

Question 20

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?

Accepted Answer

3 years. 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.

Question 21

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?

Accepted Answer

As Long Term Capital Gains (LTCG) at 12.5% without indexation.. Gold ETFs now become long-term after 12 months, with LTCG taxed at 12.5% without indexation (STCG at slab rate). A 20-month holding is therefore LTCG at 12.5%; earlier the threshold was 36 months with 20% indexed LTCG.

Question 22

Securities Transaction Tax (STT) is levied on which of the following transactions related to mutual funds?

Accepted Answer

Sale of units of an equity-oriented mutual fund.. 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.

Question 23

What is the mandatory lock-in period for investments made in an Equity Linked Savings Scheme (ELSS)?

Accepted Answer

3 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.

Question 24

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?

Accepted Answer

A non-equity-oriented fund, regardless of the underlying overseas fund's asset allocation.. Equity-oriented status requires more than 65% in listed domestic equity shares, so an FoF investing in an overseas fund is a non-equity-oriented fund for Indian tax. Its gains are taxed at slab rate if short-term and at 12.5% without indexation if held more than 24 months (earlier 20% with indexation after 36 months).

Question 25

Units of an international Fund of Funds held for more than 24 months are redeemed after 23 July 2024. How is the long-term capital gain taxed?

Accepted Answer

At 12.5% without indexation. FoFs and international funds are non-equity-oriented: STCG at slab rate, and LTCG after 24 months at 12.5% without indexation. Indexation (earlier 20% with indexation) is no longer available.

Question 26

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?

Accepted Answer

12.5% without indexation if held for more than 24 months. An FoF investing in an overseas ETF is a non-equity-oriented ('other') fund, so its LTCG arises after 24 months and is taxed at 12.5% without indexation. The earlier treatment (20% with indexation after 36 months) no longer applies, and the 12-month holding with ₹1.25 lakh exemption is only for equity-oriented funds.

Question 27

How are dividends received from a debt-oriented mutual fund taxed in the hands of a resident individual investor in India?

Accepted Answer

Taxable as 'Income from Other Sources' as per the investor's applicable income tax slab.. 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.

Question 28

An investor redeems units of a Gold ETF Fund of Funds in 2026 after holding them for 30 months. The investor is in the 30% tax bracket. How will the capital gains be taxed under current rules?

Accepted Answer

As Long Term Capital Gains (LTCG) at 12.5% without indexation.. A Gold ETF FoF is an 'other' mutual fund (FoF) for tax: STCG at slab rate and LTCG at 12.5% without indexation after 24 months. A 30-month holding is therefore LTCG at 12.5%; the investor's 30% slab is irrelevant for LTCG.

Question 29

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?

Accepted Answer

Short Term Capital Gain, taxable as per the investor's applicable income slab rate.. An FoF investing in an international ETF is non-equity-oriented, so LTCG arises only after 24 months (taxed at 12.5% without indexation). A 20-month holding is short-term and taxed at the investor's slab rate; the earlier threshold was 36 months.

Question 30

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?

Accepted Answer

65%. A scheme is equity-oriented for tax if it invests more than 65% in listed domestic equity shares. Such funds get STCG at 20% and LTCG at 12.5% above ₹1.25 lakh a year after 12 months (earlier 15% and 10% above ₹1 lakh).

Question 31

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?

Accepted Answer

It is taxable in the hands of the investor at their applicable income tax 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.

Question 32

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?

Accepted Answer

As a non-equity-oriented fund, since an FoF investing in equity mutual funds is not equity-oriented for tax.. An FoF investing in equity mutual fund units (even ELSS) does not itself hold listed domestic equity shares, so it is non-equity-oriented for tax. Its gains are taxed at slab rate if short-term and at 12.5% without indexation if held more than 24 months (earlier 36 months with indexation).

Question 33

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?

Accepted Answer

₹1,50,000 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.

Question 34

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?

Accepted Answer

TDS is applicable at 10% if the dividend income exceeds ₹10,000 in a financial year.. IDCW (dividend) is taxable in the investor's hands after DDT was abolished from April 2020. For resident investors, the mutual fund deducts TDS at 10% if the dividend exceeds ₹10,000 in a year (the threshold was earlier ₹5,000).

Question 35

Which of the following mutual fund categories is subject to Securities Transaction Tax (STT) on redemption proceeds?

Accepted Answer

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.

Question 36

An investor redeems units of a domestic Fund of Funds (FoF) which invests predominantly in domestic equity-oriented mutual fund schemes. Will Securities Transaction Tax (STT) be applicable on this redemption?

Accepted Answer

No, because such an FoF is a non-equity-oriented fund for tax, and STT applies only to equity-oriented fund units.. STT is levied only on sale/redemption/switch-out of units of equity-oriented funds. An FoF investing in equity mutual funds is non-equity-oriented for tax, so no STT applies; STT does apply to redemption of equity-oriented fund units themselves, so option d is wrong.

Question 37

For a resident individual investor, how are dividends received from mutual funds taxed after April 1, 2020?

Accepted Answer

Taxable as 'Income from Other Sources' at the investor's applicable slab rates.. 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.

Question 38

Under which of the following scenarios is a Mutual Fund mandated to deduct Tax Deducted at Source (TDS) for a resident individual investor?

Accepted Answer

On dividend (IDCW) income exceeding ₹10,000 in a financial year from a mutual fund.. For resident investors, a mutual fund must deduct TDS at 10% on IDCW if it exceeds ₹10,000 in a year (earlier ₹5,000). No TDS is deducted on redemption proceeds or capital gains for residents.

Question 39

Mr. Sharma redeemed his Gold ETF units after holding them for 40 months. What will be the tax treatment for his capital gains?

Accepted Answer

Long Term Capital Gain, taxable at 12.5% without indexation.. Gold ETF units held for more than 12 months give LTCG, taxed at 12.5% without indexation. The earlier rule (20% with indexation after 36 months) no longer applies.

Question 40

An NRI investor redeems units of a debt-oriented mutual fund, bought after 1 April 2023, after holding them for 24 months. What would be the applicable TDS rate on the capital gains for this investor?

Accepted Answer

30% plus applicable surcharge and cess. Debt-oriented fund units bought on or after 1 April 2023 are taxed at slab rate regardless of holding period, with no indexation. For an NRI the fund deducts TDS at the Income-tax Act rate (or a lower DTAA rate if documents are provided), i.e. 30% plus applicable surcharge and cess.

Question 41

Which of the following statements is true regarding the lock-in period for Equity Linked Savings Scheme (ELSS) funds?

Accepted Answer

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.. 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.

Question 42

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?

Accepted Answer

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).

Question 43

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)?

Accepted Answer

It is added to the investor's total income and taxed as 'Income from Other Sources' as per applicable slab rates.. 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.

Question 44

For Non-Resident Indian (NRI) investors, what is the general TDS rate on long-term capital gains from the sale of equity-oriented mutual fund units where STT has been paid?

Accepted Answer

12.5% (plus surcharge and cess) on gains exceeding ₹1.25 lakh.. LTCG on equity-oriented fund units is taxed at 12.5% on gains above ₹1.25 lakh a year for redemptions from 23 July 2024 (earlier 10% above ₹1 lakh). For NRIs, TDS is deducted at this rate plus surcharge and cess unless a lower DTAA rate applies.

Ch.8: Taxation

What You Will Learn in This Chapter

Multiple Choice Questions (70)

Most candidates guess their way through V-A.
BullWiser makes you prove it.

Ch.8: Taxation

What You Will Learn in This Chapter

Multiple Choice Questions (70)

Most candidates guess their way through V-A.BullWiser makes you prove it.

Most candidates guess their way through V-A.
BullWiser makes you prove it.