NISM Series X-B Chapter 12: Taxation of Other Products Practice Questions

Question 1

Mr. C lends his idle shares under a Stock Lending and Borrowing (SLB) scheme and receives a lending fee. Assuming Mr. C is not in the business of lending securities, how will this lending fee be taxed in his hands?

Accepted Answer

Under the head 'Income from Other Sources'. As per Section 13.6.1, the fee earned from lending securities is taxable under the head 'profits and gains from business or profession' if the assessee is in the business thereof; otherwise, it is taxable under the head 'Income from other sources'. Since Mr. C is not in the business of lending securities, it will be taxed under 'Income from Other Sources'. While lending is not a 'transfer' for capital gains purposes, the fee earned is still considered income

Question 2

Mr. Y purchased 5,000 shares of P Ltd. on 15-06-2022 for ₹120 each for investment purpose. P Ltd. amalgamated with Q Ltd. on 01-09-2024 to form PQ Ltd. Mr. Y was allotted 4,000 shares in the new amalgamated company. He sold these shares for ₹200 per share on 15-10-2024. The shares of PQ Ltd. are listed on a recognized stock exchange and STT was charged at the time of transfer. Compute his taxable long-term capital gain that will be subject to the 12.5% tax rate.

Accepted Answer

₹75,000. 1. Cost of acquisition of original shares in P Ltd.: 5,000 shares * ₹120 = ₹600,000.
2. Full value of consideration for shares of PQ Ltd.: 4,000 shares * ₹200 = ₹800,000.
3. Period of holding: From 15-06-2022 to 15-10-2024 is more than 12 months, hence it is a Long-Term Capital Gain (LTCG).
4. Long-Term Capital Gain (LTCG) = Sale Price - Cost of Acquisition = ₹800,000 - ₹600,000 = ₹200,000.
5. As per the NISM exam context and provided text, equity LTCG is taxed at 12.5% on gains exceeding ₹1,25,000 (after STT is paid).
6. Taxable LTCG = Total LTCG - Exemption Limit = ₹200,000 - ₹125,000 = ₹75,000

Question 3

Mr. X acquired 20,000 preference shares of ABC Ltd. on 01-01-2010 at Rs. 10 each. These preference shares were converted into 10,000 equity shares of ABC Ltd. on 01-01-2023. Mr. X sold these 10,000 equity shares on 25-08-2024 for Rs. 35 per share. Securities Transaction Tax (STT) was paid at the time of transfer. What is the Long-Term Capital Gain (LTCG) tax payable by Mr. X on the sale of the equity shares?

Accepted Answer

Rs. 3,125. 1. Tax implication at conversion: As per Section 47(xb), conversion of preference shares into equity shares of the same company is not treated as a 'transfer', so no capital gains arise at this stage.
2. Period of holding: Reckoned from the date of acquisition of preference shares (01-01-2010) to the date of sale of equity shares (25-08-2024), which is over 14 years. This qualifies as Long-Term Capital Gain (LTCG).
3. Full Value of Consideration: 10,000 equity shares * Rs. 35/share = Rs. 350,000
4. Cost of Acquisition: The cost of acquisition of the equity shares is the same as that of the preference shares. So, 20,000 preference shares * Rs. 10/share = Rs. 200,000
5. Long-Term Capital Gain (LTCG): Rs. 350,000 - Rs. 200,000 = Rs. 150,000
6. Taxable LTCG: As per NISM Module 9 context, equity LTCG is taxed at 12.5% above Rs. 1,25,000 if STT is paid. Taxable LTCG = Rs. 150,000 - Rs. 125,000 = Rs. 25,000
7. Tax Payable: Rs. 25,000 * 12.5% = Rs. 3,125

Question 4

In the context of Stock Lending and Borrowing (SLB), how is the fee earned by a lender for lending securities generally treated for income tax purposes?

Accepted Answer

It is taxable under the head 'profits and gains from business or profession' or 'Income from other sources'.. As per the chapter text, 'However, the fee earned from lending business shall be taxable under the head ‘profits and gains from business or profession’ or ‘Income from other sources’.' The lending of scrips itself is not treated as a transfer for capital gains purposes

Question 5

Mr. X acquired 20,000 preference shares of ABC Ltd. on 01-01-2010 at Rs. 10 each. These preference shares were converted into 10,000 equity shares of ABC Ltd. on 01-01-2023. Mr. X subsequently sold these 10,000 equity shares on 25-08-2024 for Rs. 35 per share. Securities Transaction Tax (STT) was paid at the time of transfer. What is the amount of long-term capital gain and the tax payable by Mr. X on the sale of equity shares?

Accepted Answer

LTCG: Rs. 150,000; Tax payable: Rs. 3,125. 1. Period of holding: The period of holding is reckoned from the date of acquisition of preference shares (01-01-2010) to the date of sale of equity shares (25-08-2024), which is more than 12 months (14+ years). Therefore, it is a Long-Term Capital Gain (LTCG).
2. Full Value of Consideration: 10,000 equity shares * Rs. 35/share = Rs. 350,000.
3. Cost of Acquisition: The cost of acquisition of equity shares is the same as that of the original preference shares: 20,000 preference shares * Rs. 10/share = Rs. 200,000.
4. Long-Term Capital Gain (LTCG): Rs. 350,000 - Rs. 200,000 = Rs. 150,000.
5. Taxable LTCG: Since STT was paid and the gain exceeds Rs. 1,25,000, the LTCG taxable at 12.50% is (Rs. 150,000 - Rs. 125,000) = Rs. 25,000.
6. Tax Payable: Rs. 25,000 * 12.50% = Rs. 3,125

Question 6

For an amalgamation to be considered valid under the Income Tax Act, which of the following conditions regarding the shareholders of the amalgamating company is mandatory?

Accepted Answer

Shareholders holding not less than 75% in value of the shares in the amalgamating company must become shareholders of the amalgamated company.. The text states: 'Shareholders holding not less than 75% in value of the shares in the amalgamating co. (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated co. or its subsidiary) become shareholders of the amalgamated co. by virtue of the amalgamation.'

Question 7

Mr. X purchased 10,000 shares of A Ltd. on 01-04-2023 for Rs. 58 each for investment purposes. On 01-08-2024, A Ltd. amalgamated with B Ltd. to form a new company AB Ltd. Mr. X was allotted 8,000 shares in the new amalgamated company. He sold these 8,000 shares for Rs. 100 per share on 01-09-2024. The shares of AB Ltd. are listed on a recognized stock exchange, and Securities Transaction Tax (STT) was charged at the time of transfer. What is Mr. X's taxable long-term capital gain and the tax payable thereon?

Accepted Answer

Taxable LTCG: Rs. 95,000; Tax payable: Rs. 11,875. 1. Period of holding: From 01-04-2023 to 01-09-2024 is 17 months, which is more than 12 months. Therefore, it is a Long-Term Capital Gain (LTCG).
2. Full Value of Consideration: 8,000 shares * Rs. 100/share = Rs. 800,000.
3. Cost of Acquisition: The cost of acquisition of shares in the amalgamated company is the cost of the original shares in the amalgamating company: 10,000 shares * Rs. 58/share = Rs. 580,000.
4. Long-Term Capital Gain (LTCG): Rs. 800,000 - Rs. 580,000 = Rs. 220,000.
5. Taxable LTCG: Since STT was paid and the gain exceeds Rs. 1,25,000, the LTCG taxable at 12.50% is (Rs. 220,000 - Rs. 125,000) = Rs. 95,000.
6. Tax Payable: Rs. 95,000 * 12.50% = Rs. 11,875

Question 8

Ms. Z acquired 15,000 preference shares of DEF Ltd. on 10-03-2011 at ₹15 each. These preference shares were converted into equity shares on 01-05-2023 at a convertible ratio of 3:1 (1 equity share for every 3 preference shares). She sold the resulting equity shares on 20-09-2024 for ₹80 per share. Securities Transaction Tax (STT) was paid at the time of transfer of shares. Compute her taxable long-term capital gain that will be subject to the 12.5% tax rate.

Accepted Answer

₹50,000. 1. Acquisition of preference shares: 15,000 shares * ₹15 = ₹225,000 (on 10-03-2011).
2. Conversion of preference shares to equity shares (01-05-2023): This is not treated as 'transfer' as per Section 47(xb). No capital gain arises at this stage.
   Number of equity shares allotted: 15,000 preference shares / 3 = 5,000 equity shares.
3. Sale of equity shares (20-09-2024):
   Full value of consideration: 5,000 shares * ₹80 = ₹400,000.
   Cost of acquisition: The cost of acquisition of equity shares is the same as that of the preference shares, i.e., ₹225,000.
   Period of holding: Reckoned from the date of acquisition of preference shares (10-03-2011 to 20-09-2024), which is more than 12 months. Hence, it is a Long-Term Capital Gain (LTCG).
   LTCG = Sale Price - Cost of Acquisition = ₹400,000 - ₹225,000 = ₹175,000.
4. Taxable LTCG: As per the NISM exam context and provided text, equity LTCG is taxed at 12.5% on gains exceeding ₹1,25,000 (after STT is paid).
   Taxable LTCG = Total LTCG - Exemption Limit = ₹175,000 - ₹125,000 = ₹50,000

Question 9

Which of the following conditions is NOT explicitly required for a transaction to be considered an 'amalgamation' for tax purposes as per the provided text?

Accepted Answer

Shareholders holding not less than 50% in value of the shares in the amalgamating company become shareholders of the amalgamated company.. As per Section 13.5(c), shareholders holding not less than 75% in value of the shares in the amalgamating company must become shareholders of the amalgamated company. Option C states 'not less than 50%', which is incorrect based on the text. Options A, B, and D are all explicitly stated conditions for amalgamation

Question 10

Mr. Y holds preference shares in ABC Ltd., which are subsequently converted into equity shares of the same company. According to Section 47(xb) of the Income Tax Act, how is this conversion transaction treated for capital gains tax purposes at the time of conversion?

Accepted Answer

It is not treated as a 'transfer', and therefore, no capital gain arises at the time of conversion.. The text explicitly states: 'Section 47(xb) provides that any conversion of preference shares of a company into equity shares of that company would not amount to ‘transfer’. However, when a person subsequently sells equity shares, the cost of acquisition thereof shall be same as that of the preference share. Further, the period of holding of equity shares shall be reckoned from the date of acquisition of the preference shares.' Thus, no capital gain arises at the time of conversion

Question 11

According to Section 47(xb) of the Income Tax Act, as mentioned in the text, what is the tax implication at the time of conversion of preference shares of a company into equity shares of that same company?

Accepted Answer

It is explicitly excluded from the definition of 'transfer', and therefore, no capital gain shall arise at the time of conversion.. The text clearly states: 'Section 47(xb) provides that any conversion of preference shares of a company into equity shares of that company would not amount to ‘transfer’. However, when a person subsequently sells equity shares, the cost of acquisition thereof shall be same as that of the preference share. Further, the period of holding of equity shares shall be reckoned from the date of acquisition of the preference shares.'

Question 12

As per the provided text, which of the following is a mandatory condition for an amalgamation to be considered valid?

Accepted Answer

Shareholders holding not less than 75% in value of the shares in the amalgamating company become shareholders of the amalgamated company.. The text states: 'Shareholders holding not less than 75% in value of the shares in the amalgamating co. ... become shareholders of the amalgamated co. by virtue of the amalgamation'. Options B and C describe scenarios explicitly stated as NOT being considered amalgamation. Option D incorrectly states 50% instead of 'All the liabilities'

Question 13

Mr. D borrowed shares under a Stock Lending and Borrowing (SLB) scheme to cover a short position. He incurred and paid a lending fee for this transaction. How is this lending fee treated for tax purposes in his hands?

Accepted Answer

It may be claimed as a deduction while computing income under capital gains or PGBP.. As per Section 13.6.2, 'The fee paid by the borrowers may be claimed as deduction while computing the income under capital gains or PGBP.' This explicitly allows for its deduction

Question 14

Mr. A lends 10,000 shares of XYZ Ltd. for one month and receives a lending fee of Rs. 200,000, incurring transaction charges of Rs. 2,000. How will the income from this lending activity be treated for taxation purposes in Mr. A's hands, as per the provided text?

Accepted Answer

The fee earned will be taxable under the head 'profits and gains from business or profession' or 'Income from other sources', after deducting related expenses.. The text explicitly states: 'Any lending of scrips or security is not treated as exchange even if lender does not receive back same distinctive numbers of scrip or security certificate. The transaction of lending of shares or any other security under the securities lending scheme would not result in ‘transfer’ for the purpose of invoking the provisions relating to capital gains under the Income Tax Act pursuant to section 47(xv) of the Act.' It further clarifies: 'However, the fee earned from lending business shall be taxable under the head ‘profits and gains from business or profession’ or ‘Income from other sources'.' And 'The assessee can claim the deduction of the expenses incurred to earn such income.'

Question 15

Mr. X purchased 10,000 shares of A Ltd. on 01-04-2023 for Rs. 58 each for investment purposes. On 01-08-2024, A Ltd. amalgamated with B Ltd. to form AB Ltd., and Mr. X was allotted 8,000 shares in the new amalgamated company. He subsequently sold these 8,000 shares of AB Ltd. for Rs. 100 per share on 01-09-2024. The shares of AB Ltd. are listed on a recognized stock exchange, and STT was charged at the time of transfer. What is the Long-Term Capital Gain (LTCG) tax payable by Mr. X?

Accepted Answer

Rs. 11,875. 1. Period of holding: From 01-04-2023 (acquisition of A Ltd. shares) to 01-09-2024 (sale of AB Ltd. shares) is 17 months. Since it is more than 12 months, the gain is Long-Term Capital Gain (LTCG).
2. Full Value of Consideration: 8,000 shares * Rs. 100/share = Rs. 800,000
3. Cost of Acquisition: The cost of acquisition of shares in the amalgamated company is the cost of original shares in the amalgamating company. So, 10,000 shares * Rs. 58/share = Rs. 580,000
4. Long-Term Capital Gain (LTCG): Rs. 800,000 - Rs. 580,000 = Rs. 220,000
5. Taxable LTCG: As per NISM Module 9 context, equity LTCG is taxed at 12.5% above Rs. 1,25,000 if STT is paid. Taxable LTCG = Rs. 220,000 - Rs. 125,000 = Rs. 95,000
6. Tax Payable: Rs. 95,000 * 12.5% = Rs. 11,875

Ch.12: Taxation of Other Products

What You Will Learn in This Chapter

Multiple Choice Questions (15)

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