NISM Series X-B Chapter 3: Features of Non-Life Insurance Products Practice Questions

Question 1

Ms. Priya works for a private organization that employs 11 people. Her last drawn basic pay is Rs 60,000 per month, and her dearness allowance is Rs 5,000 per month. She worked with the organization for 19 years and 7 months. Calculate the amount of gratuity payable to Ms. Priya.

Accepted Answer

Rs 7,50,000. The organization employs 11 people, so it is covered under the Payment of Gratuity Act, 1972.
Last drawn salary (Basic + DA) = Rs 60,000 + Rs 5,000 = Rs 65,000.
Tenure of service: 19 years and 7 months. For employees covered under the Act, tenure is 'completed year of service or part thereof in excess of 6 months.' Therefore, 19 years and 7 months is rounded up to 20 years.
Formula for employees covered under the Act: (15 X last drawn salary X tenure of working) / 26
Gratuity = (15 X 65,000 X 20) / 26
Gratuity = (19,500,000) / 26
Gratuity = Rs 7,50,000

Question 2

An individual opened a PPF account on February 15, 2017. According to the rules, from which financial year onwards can this individual make a partial withdrawal from their account?

Accepted Answer

Financial Year 2023-24. The text states, 'partial withdrawals from the account can be made after the completion of 5 financial years from the end of the financial year in which the account is opened. For example, if the account was opened on Feb 15, 2017, withdrawal can be made from the financial year 2023-24 onwards.'

Question 3

Which of the following statements about gratuity for employees covered under the Payment of Gratuity Act, 1972, is TRUE?

Accepted Answer

An organization, once covered under the Gratuity Act, remains covered even if the number of employees subsequently falls below 10.. Option A is false because an employee is eligible after a minimum of 5 years. Option B is false because last drawn salary includes basic salary, dearness allowance, and commission based on sales. Option C is false because for employees covered under the Act, tenure is calculated for each completed year of service or part thereof in excess of 6 months; 10 years and 4 months would be considered 10 years. Option D is true as stated in the text: 'Once an organisation comes under the purview of the Gratuity Act, it will always remain covered even if the total number of employees falls below 10.'

Question 4

Under the Voluntary Provident Fund (VPF) scheme, when does the interest earned on contributions become taxable as interest income?

Accepted Answer

If the aggregate employee contribution to EPF plus VPF exceeds Rs 2.5 lakh in a financial year.. The text states: 'If the aggregate employee contribution to EPF plus VPF is in excess of Rs 2.5 lakh in a financial year then the interest earned on the excess amount is taxable as interest income.'

Question 5

Ms. C is a private sector employee covered under the Payment of Gratuity Act, 1972. She retired after 25 years and 8 months of continuous service. Her last drawn basic pay was Rs 70,000 per month and Dearness Allowance was Rs 20,000 per month. She received an actual gratuity payment of Rs 15,00,000. What amount of her gratuity is taxable?

Accepted Answer

Rs 1,50,000. For private sector employees covered under the Payment of Gratuity Act, 1972, the tax-exempt amount is the LEAST of the following:
1.  Statutory limit: Rs 20,00,000
2.  Last drawn salary * 15/26 * No. of completed years of service.
    *   Last drawn salary = Basic Pay (Rs 70,000) + Dearness Allowance (Rs 20,000) = Rs 90,000 per month.
    *   No. of completed years of service = 26 years (since 25 years and 8 months is more than 6 months, it is rounded up to the next completed year for this calculation, consistent with the Act's calculation method).
    *   Calculation = Rs 90,000 * (15/26) * 26 = Rs 90,000 * 15 = Rs 13,50,000.
3.  Actual Gratuity Received: Rs 15,00,000

The least of these three amounts (Rs 20,00,000, Rs 13,50,000, Rs 15,00,000) is Rs 13,50,000. This is the tax-exempt amount.
Taxable Gratuity = Actual Gratuity Received - Exempt Amount
Taxable Gratuity = Rs 15,00,000 - Rs 13,50,000 = Rs 1,50,000

Question 6

Ms. C, an existing PPF account holder since 2010, attained NRI status on January 1, 2024. Which of the following statements accurately describes the implications for her PPF account based on the provided text?

Accepted Answer

She can continue to contribute, but her account will stop earning interest after September 30, 2024.. The text states: 'Post September 30, 2024, existing account holders who attained NRI status will be able to contribute further but cannot extend the duration of their PPF accounts. These accounts, maintained by NRIs, will not earn any interest post September 30, 2024.'

Question 7

Ms. Rina worked for a private organization not covered under the Payment of Gratuity Act, 1972, for 15 years and 11 months. Her average salary (basic pay + dearness allowance + commission based on sales) for the last 10 months was Rs 80,000 per month. If she received a gratuity of Rs 7,00,000, what is the maximum amount of gratuity that would be exempt from tax?

Accepted Answer

Rs 6,00,000. For private employees not covered under the Payment of Gratuity Act, 1972, the tax-exempt amount is the least of the following:
1. Statutory limit of Rs 20 Lakh.
2. Gratuity = Average salary x one half x No. of years of service.
3. Actual gratuity received.

Let's calculate each component:
1. Statutory limit = Rs 20,00,000.
2. Gratuity calculation based on formula:
   Average salary = Rs 80,000 (given as average of last 10 months).
   Number of years of service: For employees not covered under the Act, the tenure is taken on the basis of 'each completed year'. So, 15 years and 11 months means 15 completed years.
   Gratuity = 80,000 x 0.5 x 15 = Rs 40,000 x 15 = Rs 6,00,000.
3. Actual gratuity received = Rs 7,00,000.

The least of these three values (Rs 20,00,000, Rs 6,00,000, Rs 7,00,000) is Rs 6,00,000. Therefore, the maximum amount of gratuity exempt from tax is Rs 6,00,000

Question 8

Which of the following statements regarding the eligibility and features of a Public Provident Fund (PPF) account is TRUE?

Accepted Answer

Joint accounts and multiple PPF accounts are not permitted for an individual.. According to the text, 'NRIs are not eligible to open PPF accounts.' and 'Parents/guardians can also open PPF accounts for their minor children.' It also states, 'Opening of joint accounts and multiple accounts are not allowed.' The minimum annual investment is Rs. 500, not Rs. 100

Question 9

Mr. Shah opened a PPF account in 2010. In 2023, he attained NRI status. Which of the following statements is true regarding his PPF account as per the provided text?

Accepted Answer

He can continue to contribute to his PPF account, but it will not earn any interest post September 30, 2024.. The text states: 'Post September 30, 2024, existing account holders who attained NRI status will be able to contribute further but cannot extend the duration of their PPF accounts. These accounts, maintained by NRIs, will not earn any interest post September 30, 2024.' Option A is incorrect as he can contribute. Option C is incorrect as NRIs cannot extend the duration after September 2024. Option D is incorrect as premature closure due to change in residency is a condition for closure, not an automatic closure without conditions, and the text specifies they *can* contribute further

Question 10

Which of the following statements regarding Public Provident Fund (PPF) accounts is FALSE?

Accepted Answer

After September 30, 2024, an existing PPF account holder who becomes an NRI can extend the duration of their account.. As per the text, 'Post September 30, 2024, existing account holders who attained NRI status will be able to contribute further but cannot extend the duration of their PPF accounts.' Therefore, option D is false

Question 11

Mr. B worked for 'Alpha Solutions' for 18 years and 9 months. Alpha Solutions is an organization that employs 8 people and is NOT covered under the Payment of Gratuity Act, 1972. Mr. B's last drawn basic pay was Rs 50,000 per month, Dearness Allowance was Rs 10,000 per month, and he received a commission based on sales of Rs 5,000 per month. What is the amount of gratuity payable to Mr. B?

Accepted Answer

Rs 5,85,000. For employees not covered under the Act, the formula is (15 X last drawn salary X tenure of working) divided by 30. Salary is inclusive of basic pay, dearness allowance, and commission based on sales. Tenure is based on each completed year.
1.  Last drawn salary = Basic Pay (Rs 50,000) + Dearness Allowance (Rs 10,000) + Commission (Rs 5,000) = Rs 65,000 per month.
2.  Tenure of working = 18 completed years (since he worked for 18 years and 9 months, only completed years are counted).
3.  Gratuity = (15 * Rs 65,000 * 18) / 30 = Rs 5,85,000

Question 12

Under the Voluntary Provident Fund (VPF) scheme, when does the interest earned become taxable?

Accepted Answer

Interest earned on the excess amount is taxable as interest income if the aggregate employee contribution to EPF plus VPF exceeds Rs 2.5 lakh in a financial year.. The text states: 'If the aggregate employee contribution to EPF plus VPF is in excess of Rs 2.5 lakh in a financial year then the interest earned on the excess amount is taxable as interest income.'

Question 13

Under the Voluntary Provident Fund (VPF) scheme, what happens to the interest earned on employee contributions if the aggregate contribution to EPF plus VPF exceeds Rs 2.5 lakh in a financial year?

Accepted Answer

The interest earned on the excess amount (above Rs 2.5 lakh) is taxable as interest income.. As per the text, 'If the aggregate employee contribution to EPF plus VPF is in excess of Rs 2.5 lakh in a financial year then the interest earned on the excess amount is taxable as interest income.'

Question 14

What is a key eligibility criterion for opening a Public Provident Fund (PPF) account?

Accepted Answer

Only an Indian resident can open a PPF account.. According to the text, 'Only an Indian resident can open a PPF account'. NRIs are not eligible to open new accounts, and opening of joint accounts and multiple accounts are not allowed

Question 15

According to the provided text, under what circumstances can an employee be eligible to receive gratuity even if they have NOT completed the minimum 5 years of continuous service with an organization?

Accepted Answer

At the death of an employee or if they have become disabled due to an accident or disease.. The text states: 'A person is eligible to receive gratuity only if he has completed minimum 5 years of continuous service with an organisation. However, it can be paid before the completion of five years at the death of an employee or if he has become disabled due to an accident or disease.'

Question 16

An individual opened a PPF account on March 10, 2018. When can this individual make the first partial withdrawal, and what is the maximum amount allowed for withdrawal in a financial year?

Accepted Answer

From financial year 2023-24 onwards; maximum of 50% of the account balance at the end of the preceding year or 50% of the balance at the end of the 4th year preceding the withdrawal application, whichever is lower.. The text states, 'partial withdrawals from the account can be made after the completion of 5 financial years from the end of the financial year in which the account is opened. For example, if the account was opened on Feb 15, 2017, withdrawal can be made from the financial year 2023-24 onwards.' For an account opened on March 10, 2018, the financial year ends on March 31, 2018. Five financial years after March 31, 2018, would conclude on March 31, 2023. Thus, withdrawals can be made from FY 2023-24 onwards. The maximum amount is 'the lower of the following: 50% of the account balance as at the end of the preceding year, or 50% of the account balance as at the end of the 4th year, immediately preceding the year of withdrawal application.'

Question 17

A PPF account holder wishes to extend the tenure of their account with further contributions after the initial 15-year lock-in period. Which of the following statements is TRUE regarding this process?

Accepted Answer

After extending with contributions, a maximum of 60% of the balance as on the date of extension can be withdrawn.. The text states: 'Once the account is extended with contributions, the maximum 60% of the balance as on the date of extension of the account can be withdrawn.'
Option B is incorrect as the choice must be made 'within one year before the date of maturity.'
Option C is incorrect as 'Once the PPF account is renewed with/without contribution, the option cannot be switched.'
Option D is incorrect as 'A maximum of one withdrawal can be made in a year.'

Question 18

Mr. B worked for an organization not covered under the Payment of Gratuity Act, 1972. His last drawn basic pay was Rs. 75,000 per month, and he worked for 18 years and 9 months. What would be the amount of gratuity payable to Mr. B?

Accepted Answer

Rs. 6,75,000. For employees not covered under the Act, the formula is: (15 X last drawn salary X tenure of working) divided by 30. The number of years of service is taken on the basis of each completed year.
Last drawn salary = Rs. 75,000
Tenure of working = 18 years (since 9 months is not a completed year for this category)
Gratuity = (15 * 75,000 * 18) / 30 = (1,125,000 * 18) / 30 = 20,250,000 / 30 = Rs. 6,75,000

Question 19

Which of the following statements regarding eligibility for opening a Public Provident Fund (PPF) account is TRUE?

Accepted Answer

Only an Indian resident can open a PPF account, and joint accounts are not allowed.. As per the text, 'Only an Indian resident can open a PPF account' and 'Opening of joint accounts and multiple accounts are not allowed'. NRIs are not eligible to open PPF accounts, and parents/guardians *can* open accounts for minors

Question 20

Mr. S, a private sector employee, retired after 25 years and 3 months of service. His last drawn basic pay was Rs. 80,000 per month and dearness allowance was Rs. 20,000 per month. He received a gratuity of Rs. 15,00,000. If his employer is NOT covered under the Payment of Gratuity Act, 1972, and his average salary for the last 10 months was Rs. 1,00,000 (Basic + DA), what is the taxable gratuity amount?

Accepted Answer

Rs. 2,50,000. For private employees not covered under the Payment of Gratuity Act, 1972, the tax-exempt gratuity is the least of the following:
1. Statutory limit: Rs. 20,00,000
2. Gratuity = Average salary x one half x No. of years of service.
   Average salary = Rs. 1,00,000
   No. of years of service (completed years) = 25 years (since 3 months is not a completed year).
   Exempt amount = Rs. 1,00,000 x 0.5 x 25 = Rs. 12,50,000.
3. Actual gratuity received: Rs. 15,00,000.

The least of these three amounts is Rs. 12,50,000. 
Taxable gratuity = Actual gratuity received - Exempt amount
Taxable gratuity = Rs. 15,00,000 - Rs. 12,50,000 = Rs. 2,50,000

Question 21

Which of the following is NOT a valid condition for prematurely closing a Public Provident Fund (PPF) account after completing 5 financial years from the end of the year of account opening?

Accepted Answer

To purchase a new residential property.. The text lists valid conditions for premature closure as: treatment of life-threatening diseases, financing higher education, or change in residency status. Purchasing a new residential property is not mentioned as a condition

Question 22

For private sector employees not covered under the Payment of Gratuity Act, 1972, which of the following is the LAST condition in determining the tax-exempt amount of gratuity?

Accepted Answer

Actual gratuity received.. For private employees not covered under the Payment of Gratuity Act, 1972, any gratuity received is tax exempt to the extent of the *least* of the following:
1. Statutory limit of Rs 20 Lakh.
2. Gratuity = Average salary x one half x No. of years of service.
3. Actual gratuity received.
The question asks for the 'LAST condition', which refers to the third point in this list. Option D is a formula used for employees *covered* under the Act for tax exemption calculation, not for those not covered

Question 23

Mr. Sharma retired from a company covered under the Payment of Gratuity Act, 1972, after serving for 18 years and 8 months. His last drawn basic pay was Rs 75,000 per month, and his dearness allowance was Rs 25,000 per month. Based on the calculation methodology demonstrated in the provided text for covered employees, what is the amount of gratuity payable to Mr. Sharma?

Accepted Answer

Rs 8,22,115. For employees covered under the Act, the formula is (15 X last drawn salary X tenure of working) / 26.
Based on the examples provided in the text for calculation (e.g., (15 X 60,000 X 21)/26), 'last drawn salary' in this formula refers to the basic pay.
Last drawn Basic Pay = Rs 75,000.
Tenure of working: 18 years and 8 months. As per the rule 'part thereof in excess of 6 months', this is rounded up to 19 years.
Gratuity = (15 X 75,000 X 19) / 26
Gratuity = (1,125,000 X 19) / 26
Gratuity = 21,375,000 / 26 = Rs 8,22,115.38.
Rounding to the nearest rupee, the amount is Rs 8,22,115

Question 24

Which of the following statements is TRUE regarding Superannuation Benefits, as per the provided text?

Accepted Answer

The employer's contribution to PF and superannuation fund combined is restricted to 27% of the employee's earnings.. A) Incorrect. The text states: 'On retirement, the employee is allowed to take one third of the accumulation in his account as commutation.'
B) Correct. The text states: 'Income Tax rules restrict the employer’s contribution, whether to the PF or superannuation fund or a combination of both, to 27 percent of the employee’s earnings.'
C) Incorrect. The text states: 'Payments received at the time of retirement are completely exempt from tax only in specified conditions.'
D) Incorrect. The text states: 'Apart from LIC, all other life insurance companies allow its customers to purchase annuity from any annuity provider.' This implies LIC does not

Question 25

Mr. Anil opened his PPF account on February 15, 2017. When is he first eligible to make a partial withdrawal from his account, and what is the maximum loan he could take if his balance at the end of the 2nd financial year (immediately preceding the loan application year) was Rs 1,00,000?

Accepted Answer

Partial withdrawal from FY 2023-24; maximum loan of Rs 25,000.. Partial withdrawal: The text states, 'partial withdrawals from the account can be made after the completion of 5 financial years from the end of the financial year in which the account is opened.' It then provides a specific example: 'For example, if the account was opened on Feb 15, 2017, withdrawal can be made from the financial year 2023-24 onwards.' Following this example, Mr. Anil would be eligible for partial withdrawal from FY 2023-24.
Loan against PPF: A loan can be taken 'from the beginning of 3rd financial year till the end of the 6th financial year from the date of account opening.' Account opened Feb 15, 2017 (FY 2016-17). The 3rd financial year would be FY 2018-19. The maximum loan is '25% of the total balance at the end of the 2nd financial year immediately preceding the year in which loan is applied.' If the loan is applied in FY 2018-19, the 2nd financial year immediately preceding would be FY 2016-17. If the balance at the end of FY 2016-17 was Rs 1,00,000, the maximum loan would be 25% of Rs 1,00,000 = Rs 25,000

Question 26

Which of the following statements regarding partial withdrawals from a Public Provident Fund (PPF) account is TRUE?

Accepted Answer

If a PPF account was opened on February 15, 2017, the earliest partial withdrawal can be made in the financial year 2023-24.. Option A is false; partial withdrawals are allowed after completion of 5 financial years. Option B is false; only one partial withdrawal is allowed per financial year. Option C is false; the maximum amount is the 'lower of' the two conditions, not the higher. Option D is true; the text states, 'For example, if the account was opened on Feb 15, 2017, withdrawal can be made from the financial year 2023-24 onwards.'

Question 27

Which of the following statements about Superannuation Benefits or National Pension System (NPS) is INCORRECT?

Accepted Answer

NPS is open to all Indian citizens on a voluntary basis, including employees from the armed forces.. Option A is correct: 'On retirement, the employee is allowed to take one third of the accumulation in his account as commutation.' Option B is correct: 'However, payment received at the time of death, from an approved Superannuation Fund, remains exempted from tax.' Option D is correct: 'Aggregated with EPF and NPS, the contributions are treated as perquisite if they exceed Rs 7.5 lakhs in a financial year.' Option C is incorrect: The text states, 'This pension scheme is open to employees from the public and private sectors, except those from the armed forces.'

Question 28

In the context of Superannuation Benefits, what does 'commutation' refer to?

Accepted Answer

The exercise of taking a portion of the annuity corpus in a lumpsum at retirement.. The text explicitly states: 'On retirement, the employee is allowed to take one third of the accumulation in his account as commutation. Commutation refers to the exercise of the facility of taking a portion of the annuity corpus in a lumpsum.'

Question 29

As per the text, what is the tax treatment for Voluntary Provident Fund (VPF) contributions, interest earned, and withdrawals?

Accepted Answer

All are exempt from tax up to a specified limit, and interest on aggregate employee contributions (EPF+VPF) exceeding Rs 2.5 lakh in a financial year is taxable.. The text states: 'All contributions, interest earned and withdrawals are exempt from tax upto a specified limit. If the aggregate employee contribution to EPF plus VPF is in excess of Rs 2.5 lakh in a financial year then the interest earned on the excess amount is taxable as interest income.'

Question 30

An employee, covered under the Payment of Gratuity Act, 1972, has a last drawn basic pay of Rs 75,000 per month and has worked with the company for 15 years and 8 months. Assuming no dearness allowance or commission, calculate the gratuity payable.

Accepted Answer

Rs 6,92,307.69. For employees covered under the Act, the formula is: (15 X last drawn salary X tenure of working) / 26. The 'last drawn salary' is Rs 75,000. The 'tenure of working' for employees covered under the Act is 'each completed year of service or part thereof in excess of 6 months'. Since the employee worked for 15 years and 8 months (which is 8 months in excess of 6 months), the tenure will be considered as 16 years.
Gratuity = (15 * 75,000 * 16) / 26
Gratuity = 18,000,000 / 26
Gratuity = Rs 692,307.69

Ch.3: Features of Non-Life Insurance Products

What You Will Learn in This Chapter

Multiple Choice Questions (30)

Case-Based Questions (1 sets)

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