NISM Series X-B Chapter 10: Taxation of Debt Products Practice Questions

Question 1

According to the text, which of the following is a benefit that IS allowed when computing long-term capital gains taxable at the rate of 12.50% under Section 112A?

Accepted Answer

Adjustment of maximum exemption limit. The text states: 'No deduction shall be available under Sections 80C to 80U from the long-term capital gains taxable at the rate of 12.50% under Section 112A.' It also mentions 'No Section 87A rebate from long-term capital gain covered under section 112A' and 'No computation in foreign currency' as benefits not allowed. However, under 'Adjustment of Exemption Limit from Capital Gains', it explicitly states that if total income (excluding certain capital gains) is less than the maximum exemption limit, the amount of such capital gains 'shall be reduced by that amount that would enable the individual or HUF to fully claim the maximum exemption limit.' This indicates that the adjustment of the maximum exemption limit is allowed

Question 2

Consider a resident individual taxpayer making investments after April 1, 2023. Which of the following statements regarding the taxation of capital assets is INCORRECT based on the provided text?

Accepted Answer

Long-term capital gains arising from the transfer of listed equity shares are taxable at 12.50% if the aggregate amount exceeds Rs. 1,25,000, and the benefit of indexation is available for computing such gains.. Let's analyze each statement:
A.  **Correct.** As per the table (Sr. No. 6), Debt Funds and ETFs bought >= April 1, 2023, are 'Always short term' and taxed at 'Slab rate'.
B.  **Incorrect.** As per Note 2, long-term capital gains from listed equity shares are indeed taxable at 12.50% if the aggregate amount exceeds Rs. 1,25,000. However, Note 1 explicitly states: 'In view of the amendment brought by the Finance Act, 2024, the benefit of indexation is now not available on any asset (except immovable property in certain cases).' Therefore, the claim that the benefit of indexation is available is incorrect.
C.  **Correct.** As per the table (Sr. No. 1), for Listed Equity Shares, the holding period for classification as Long Term is '> 12 months'. If held for 10 months, it is Short-Term Capital Gain (STCG), which is taxed at 20%.
D.  **Correct.** As per the table under 'Mutual Funds (unlisted) & Other Unlisted Assets' (Sr. No. 10), Unlisted Bonds/Debentures (not including MLDs) are classified as 'Always short term' and taxed at 'Slab rate'

Question 3

Which of the following benefits is NOT available from long-term capital gains taxable at the rate of 12.50% or short-term capital gains taxable at 20% under Section 111A?

Accepted Answer

Deduction under Sections 80C to 80U. As per Section 11.9.1 and 11.9.2, 'No deduction shall be available under Sections 80C to 80U from the long-term capital gains taxable at the rate of 12.50%' and 'No deduction shall be available under Sections 80C to 80U from the short-term capital gains chargeable to tax at concessional rate of 20%'. This deduction is explicitly denied for both types of capital gains mentioned

Question 4

Mr. S purchased 2,000 units of an unlisted equity mutual fund at Rs. 150 per unit on 15-08-2024. The fund declared a 1:1 bonus issue with the record date on 01-10-2024. After receiving the bonus units, Mr. S sold the original 2,000 units on 15-05-2025 at a price of Rs. 130 per unit, while still holding the bonus units. What will be the deemed cost of acquisition per bonus unit for Mr. S as per Section 94(8) of the Income Tax Act?

Accepted Answer

Rs. 20 per unit. According to Section 94(8), if a person acquires securities/units within 3 months before the record date for a bonus issue and sells the original units within 9 months after the record date while holding the bonus units, any loss arising on the transfer of original units shall be ignored and deemed to be the cost of acquisition of the bonus units.

1.  **Acquisition Details:** Mr. S purchased 2,000 units at Rs. 150/unit on 15-08-2024.
2.  **Record Date:** 01-10-2024 (Acquisition is within 3 months before the record date).
3.  **Bonus Issue:** 1:1, so 2,000 bonus units received.
4.  **Sale of Original Units:** 2,000 units sold at Rs. 130/unit on 15-05-2025 (Sale is within 9 months after the record date, and bonus units are still held).
5.  **Loss on Original Units:** (Rs. 150 - Rs. 130) * 2,000 units = Rs. 20 * 2,000 = Rs. 40,000.
6.  **Deemed Cost of Bonus Units:** This loss of Rs. 40,000 will be ignored for computing income chargeable to tax and will be deemed to be the cost of acquisition of the 2,000 bonus units.
7.  **Deemed Cost per Bonus Unit:** Rs. 40,000 / 2,000 units = Rs. 20 per unit

Question 5

Mr. Ravi purchased 2,000 units of a listed equity at Rs. 110 per unit on 01-07-2023. The company declared a 1:1 bonus share allotment on 01-09-2023. After receiving the bonus shares, Mr. Ravi sold the original 2,000 shares on 01-03-2024 at a price of Rs. 98 per share, while continuing to hold the bonus shares. What is the tax treatment of the loss incurred on the sale of original shares and the deemed cost of the bonus shares?

Accepted Answer

The loss of Rs. 24,000 is ignored, and the deemed cost of acquisition for the 2,000 bonus shares is Rs. 12 per share.. As per Section 94(8) of the Income Tax Act (Bonus Stripping provisions), if a person acquires securities within 3 months before the record date (01-07-2023 to 01-09-2023) and sells the original units within 9 months after the record date (01-09-2023 to 01-03-2024) while continuing to hold the bonus shares, any loss arising on the transfer of original shares shall be ignored. This ignored loss is then deemed to be the cost of acquisition of the bonus shares.
1. Cost of acquisition of original shares: 2,000 * Rs. 110 = Rs. 220,000
2. Sale price of original shares: 2,000 * Rs. 98 = Rs. 196,000
3. Loss on original shares = Rs. 220,000 - Rs. 196,000 = Rs. 24,000.
This loss of Rs. 24,000 is ignored for computing income. Consequently, the cost of acquisition of the 2,000 bonus shares is deemed to be Rs. 24,000, making the per share cost Rs. 24,000 / 2,000 = Rs. 12

Question 6

Mr. P (resident in India) is engaged in trading shares and derivatives. He purchased 3 call options of Y Ltd. at a premium of Rs. 30 per share on 10-09-2024. Each option has a lot size of 500 shares and an exercise price of Rs. 300 per share. The date of expiry is 25-09-2024. On 18-09-2024, he exercised 1 call option to buy 500 shares of Y Ltd. at the exercise price. He subsequently sold these 500 shares for Rs. 380 each on 05-11-2024. The remaining 2 call options expired worthless on 25-09-2024. Determine Mr. P's total business income or loss from these transactions.

Accepted Answer

Rs. 5,000 Business Loss. As Mr. P is trading in shares and derivatives, any income arising therefrom shall be taxable as normal business income.

1.  **Total Cost of Acquisition of Options:**
    *   Total shares represented by 3 options: 3 options * 500 shares/option = 1,500 shares
    *   Total premium paid: 1,500 shares * Rs. 30/share = Rs. 45,000

2.  **Transactions related to Exercised Option (1 call option = 500 shares):**
    *   Cost of acquiring shares upon exercise: 500 shares * Rs. 300 (exercise price) = Rs. 150,000
    *   Sale price of shares: 500 shares * Rs. 380/share = Rs. 190,000

3.  **Transactions related to Expired Options (2 call options = 1,000 shares):**
    *   Sale price: Rs. 0 (as they expired worthless)

4.  **Computation of total Business Income/Loss:**
    *   **Total Sale Consideration:** Rs. 190,000 (from sale of shares) + Rs. 0 (from expired options) = Rs. 190,000
    *   **Total Purchase Cost:** Rs. 150,000 (cost of exercised shares) + Rs. 45,000 (total premium paid for all options) = Rs. 195,000
    *   **Business Income/Loss:** Total Sale Consideration - Total Purchase Cost = Rs. 190,000 - Rs. 195,000 = (Rs. 5,000) Business Loss

Question 7

As per the Finance Act, 2024, and the provided summary, which of the following statements regarding the taxation of debt-oriented investments or capital assets for a resident individual is correct?

Accepted Answer

Debt Funds and ETFs (investing > 65% in debt or money market) bought on or after April 1, 2023, are always taxed as Short Term Capital Gains at slab rates.. A) From the summary table, Sr. No. 6 under 'Listed Securities': 'Debt Funds and ETF (invests > 65% directly or indirectly in debt or money market) bought >= April 1, 2023' are classified as 'Always short term' for Holding Period and 'Slab rate' for STCG. LTCG is 'Not Applicable'. This statement is correct.
B) From the summary table, Sr. No. 8 under 'Listed Securities': While the STCG and LTCG rates/holding periods are correct, Note 1 explicitly states: 'the benefit of indexation is now not available on any asset (except immovable property in certain cases).' So, indexation benefit is not available for listed bonds/debentures. This statement is incorrect.
C) From the summary table, Sr. No. 10 under 'Mutual Funds (unlisted) & Other Unlisted Assets': 'Unlisted Bonds/ Debentures/ SGB (not incl. MLDs)' are classified as 'Always short term' for Holding Period and 'Slab rate' for STCG. LTCG is 'Not Applicable'. Therefore, there's no LTCG, and no indexation benefit. This statement is incorrect.
D) From the summary table, Sr. No. 13 under 'Mutual Funds (unlisted) & Other Unlisted Assets': For 'Immovable property (being land or building or both) bought after July 23, 2024', LTCG is 12.5% or 20% after indexation, *whichever is lower (the second option is available only for property bought before July 23, 2024)*. This clearly indicates that for property bought *after* July 23, 2024, the indexation benefit is *not* available. This statement is incorrect

Question 8

Mr. Sharma, a resident individual, has a total income (excluding long-term capital gains) of Rs. 2,00,000. He also has a long-term capital gain from the sale of unlisted shares amounting to Rs. 1,50,000. Assuming the maximum exemption limit for a resident individual is Rs. 2,50,000 (under the old tax regime), what amount of his long-term capital gain will be subject to tax?

Accepted Answer

Rs. 1,00,000. As per the adjustment of exemption limit rules, if the total income of a resident individual (excluding long-term capital gains) is less than the maximum exemption limit, the amount of such capital gains shall be reduced by that amount that would enable the individual to fully claim the maximum exemption limit.
1. Mr. Sharma's total income (excluding LTCG) = Rs. 2,00,000.
2. Maximum exemption limit = Rs. 2,50,000.
3. The amount by which his total income falls short of the exemption limit = Rs. 2,50,000 - Rs. 2,00,000 = Rs. 50,000.
4. This shortfall of Rs. 50,000 will be adjusted against his long-term capital gain.
5. Taxable long-term capital gain = Original LTCG - Shortfall = Rs. 1,50,000 - Rs. 50,000 = Rs. 1,00,000

Question 9

Which of the following benefits is explicitly stated as *not allowed* from long-term capital gains taxable at the concessional rate of 12.50% under Section 112A (e.g., from listed equity shares, units of equity-oriented mutual fund)?

Accepted Answer

All of the above.. The text under '11.9.1 Benefits not allowed from long-term capital gain chargeable to tax at the rate of 12.50%' explicitly lists:
*   'No deduction shall be available under Sections 80C to 80U from the long-term capital gains taxable at the rate of 12.50%.'
*   'No computation in foreign currency... shall not be allowed when the long-term capital gain is chargeable to tax at concessional rate of 12.50%.'
*   'No Section 87A rebate from long-term capital gain covered under 112A.'
Therefore, all the listed benefits are not allowed

Question 10

For an individual engaged in the trading of shares and derivatives, how is any income arising from these activities generally taxed?

Accepted Answer

As normal business income, subject to applicable tax rates.. The provided text explicitly states that for an individual trading in shares and derivatives, any income arising therefrom shall be taxable as normal business income. Note 4 also clarifies that income from derivatives is considered as business income or income from other sources

Question 11

Which of the following benefits is NOT allowed from long-term capital gains taxable at the concessional rate of 12.50% under Section 112A (LTCG from specified securities like equity shares, equity-oriented MFs, etc., exceeding Rs. 1,25,000)?

Accepted Answer

All of the above.. The text explicitly states that for long-term capital gains taxable at the concessional rate of 12.50%:
- No deduction shall be available under Sections 80C to 80U.
- The mode of computation of capital gain in foreign currency, as available to non-residents for certain assets, shall not be allowed.
- Rebate under Section 87A is not available from income-tax payable on long-term capital gain covered under Section 112A.
Therefore, all the options listed are benefits that are not allowed

Question 12

Mr. A, a resident, is engaged in trading shares and derivatives. He purchased 5 call options of Z Ltd. (Lot size 1,000 shares per option) at a premium of Rs. 22 per share. The exercise price was Rs. 200 per share. He exercised 2 call options to buy 2,000 shares at the exercise price and subsequently sold these shares for Rs. 250 each. The remaining 3 call options were sold at a premium of Rs. 27 per share. Calculate Mr. A's total business income.

Accepted Answer

Rs. 71,000. This calculation follows the method for business income from derivatives as shown in Example 11.
1.  **Total Sale Consideration:**
    *   Sale price of shares (exercised options) = (2 options * 1,000 shares/option) * Rs. 250/share = 2,000 * Rs. 250 = Rs. 500,000
    *   Sale price of remaining options = (3 options * 1,000 shares/option) * Rs. 27/share = 3,000 * Rs. 27 = Rs. 81,000
    *   Total Sale Consideration = Rs. 500,000 + Rs. 81,000 = Rs. 581,000
2.  **Total Purchase Cost:**
    *   Cost of acquisition of shares (exercised) = (2 options * 1,000 shares/option) * Rs. 200/share (exercise price) = 2,000 * Rs. 200 = Rs. 400,000
    *   Cost of acquisition of all options (initial premium paid) = (5 options * 1,000 shares/option) * Rs. 22/share (premium) = 5,000 * Rs. 22 = Rs. 110,000
    *   Total Purchase Cost = Rs. 400,000 + Rs. 110,000 = Rs. 510,000
3.  **Business Income:**
    *   Business Income = Total Sale Consideration - Total Purchase Cost
    *   Business Income = Rs. 581,000 - Rs. 510,000 = Rs. 71,000

Question 13

Based on the provided text, if Mr. X is actively trading in shares and derivatives, how will any income arising from these activities be primarily taxed?

Accepted Answer

As normal business income. The text explicitly states: 'As Mr. X is trading in shares and derivatives, any income arising therefrom shall be taxable as normal business income.' (Page 249 and Note 4 on Page 258)

Question 14

Which of the following benefits is NOT allowed from long-term capital gains taxable at the concessional rate of 12.50% under Section 112A?

Accepted Answer

Both A and C.. As per Section 11.9.1 of the text:
*   'No deduction shall be available under Sections 80C to 80U from the long-term capital gains taxable at the rate of 12.50%.'
*   'No Section 87A rebate from long-term capital gain covered under 112A'.

However, the adjustment of the exemption limit (Section 11.10) is a benefit that *is* allowed, where the capital gains can be reduced by the amount that enables the individual or HUF to fully claim the maximum exemption limit

Question 15

Mr. Ravi purchased 1,000 units of a listed equity at Rs. 106 per unit on 01-07-2023. The company declared a 1:1 bonus share allotment on 01-09-2023. Mr. Ravi sold the original 1,000 shares on 01-04-2024 at Rs. 95 per share, while continuing to hold the bonus shares. What will be the deemed cost of acquisition per bonus share for Mr. Ravi due to bonus stripping provisions?

Accepted Answer

Rs. 11. As per Section 94(8) on Bonus Stripping, since Mr. Ravi acquired shares within 3 months before the record date (01-07-2023 to 01-09-2023) and sold original shares within 9 months after the record date (01-09-2023 to 01-04-2024) while holding bonus shares, the loss on original shares is ignored and deemed as the cost of bonus shares.
1.  Loss on original shares = (Purchase Price - Sale Price) * Number of shares
2.  Loss = (Rs. 106 - Rs. 95) * 1,000 = Rs. 11 * 1,000 = Rs. 11,000.
3.  This Rs. 11,000 is the deemed cost of acquisition for the 1,000 bonus shares.
4.  Therefore, cost per bonus share = Rs. 11,000 / 1,000 shares = Rs. 11

Question 16

According to the provided text, what is the tax treatment for Long Term Capital Gains (LTCG) arising from the sale of 'Debt Funds and ETF (invests > 65% directly or indirectly in debt or money market) bought >= April 1, 2023'?

Accepted Answer

Not Applicable, as it is always considered Short Term.. Referring to the 'Summary of Taxation of Equity Products and Other Capital Assets' table, Sr. No. 6 under 'Listed Securities' category, for 'Debt Funds and ETF (invests > 65% directly or indirectly in debt or money market) bought >= April 1, 2023':
*   The 'Holding Period for classification as Long Term' is specified as 'Always short term'.
*   Consequently, the columns for 'LTCG' (both before and after Apr 1, 2025) state 'Not Applicable'.

Therefore, LTCG is not applicable because these assets are always classified as short-term if bought on or after April 1, 2023

Question 17

Mr. B purchased 500 units of a listed equity mutual fund at Rs. 120 per unit on 15-06-2023. The fund declared a 1:1 bonus on 01-08-2023. Mr. B sold the original 500 units on 01-03-2024 at a price of Rs. 105 per unit, while continuing to hold the bonus units. What is the deemed cost of acquisition per bonus unit for Mr. B, as per Section 94(8) of the Income Tax Act?

Accepted Answer

Rs. 15. The scenario meets the conditions for Section 94(8) (bonus stripping):
1.  Units acquired within 3 months before record date (15-06-2023 is within 3 months of 01-08-2023).
2.  Bonus units allotted (1:1 bonus).
3.  Original units sold within 9 months after record date (01-03-2024 is within 9 months of 01-08-2023).
4.  Bonus units are still held.

Loss arising on transfer of original units:
*   Cost of acquisition of original units = 500 units * Rs. 120 = Rs. 60,000
*   Sale price of original units = 500 units * Rs. 105 = Rs. 52,500
*   Loss = Rs. 60,000 - Rs. 52,500 = Rs. 7,500

As per Section 94(8), this loss of Rs. 7,500 shall be ignored for computing income chargeable to tax. This amount is then deemed to be the cost of acquisition of the bonus units.
Since it was a 1:1 bonus, Mr. B received 500 bonus units.
Deemed cost of acquisition per bonus unit = Total deemed cost / Number of bonus units = Rs. 7,500 / 500 units = Rs. 15 per unit

Question 18

For an individual engaged in the trading of shares and derivatives, how is the income arising from such activities typically treated for taxation purposes?

Accepted Answer

As normal business income.. As per the provided text, in examples for Mr. X and Mr. A, it is explicitly stated: 'As Mr. X is trading in shares and derivatives, any income arising therefrom shall be taxable as normal business income.'

Question 19

Mr. Ravi purchased 1,000 units of a listed equity at Rs. 106 per unit on 01-07-2023. The company declared a 1:1 bonus share allotment on 01-09-2023 (record date). After receiving the bonus shares, Mr. Ravi sold the original 1,000 shares on 01-04-2024 at a price of Rs. 95 per share, while continuing to hold the bonus shares. What will be the deemed cost of acquisition for the 1,000 bonus shares for Mr. Ravi?

Accepted Answer

Rs. 11,000. As per Section 94(8) of the Income Tax Act (Bonus Stripping provisions):
1. Mr. Ravi acquired shares within 3 months before the record date (01-07-2023 to 01-09-2023).
2. He sold the original shares within 9 months after the record date (01-09-2023 to 01-04-2024) while continuing to hold the bonus shares.
3. Therefore, the loss arising on the transfer of original shares shall be ignored for tax computation and will be deemed to be the cost of acquisition of the bonus shares.
Loss on original shares = (Cost of Acquisition - Sale Price) * Number of shares
Loss = (Rs. 106 - Rs. 95) * 1,000 shares = Rs. 11 * 1,000 = Rs. 11,000.
This ignored loss of Rs. 11,000 will be the deemed cost of acquisition for the 1,000 bonus shares

Ch.10: Taxation of Debt Products

What You Will Learn in This Chapter

Multiple Choice Questions (19)

Case-Based Questions (1 sets)

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