A tax illustration with explicit assumptions
Series XIX-A case study · set 2, case 5 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
0 right · 0 wrong · 4 to go
The case · stays here for all 4 questions
A distributor prepares an illustration for a fictional investor. During one year, the investor’s allocation includes ₹8 lakh of taxable income and ₹12 lakh of returned capital. For this exercise only, the tax rate on that income is assumed to be 20%, the capital return is assumed not to be taxable, and no surcharge, cess, deduction or other tax applies. The fund withholds ₹1 lakh from the total ₹20 lakh cash distribution and remits it as a credit against the investor’s final tax. All income is taxable in the same year. These assumptions deliberately simplify the calculation and do not state the current Indian tax treatment of any particular investor or AIF.
The tax rate and treatment are fictional calculation inputs.
Withholding is a credit against final tax, not an extra tax.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A distributor prepares an illustration for a fictional investor. During one year, the investor’s allocation includes ₹8 lakh of taxable income and ₹12 lakh of returned capital. For this exercise only, the tax rate on that income is assumed to be 20%, the capital return is assumed not to be taxable, and no surcharge, cess, deduction or other tax applies. The fund withholds ₹1 lakh from the total ₹20 lakh cash distribution and remits it as a credit against the investor’s final tax. All income is taxable in the same year. These assumptions deliberately simplify the calculation and do not state the current Indian tax treatment of any particular investor or AIF.
The tax rate and treatment are fictional calculation inputs.
Withholding is a credit against final tax, not an extra tax.
Q1What is the final tax liability under the illustration?
Option A. ₹1.00 lakh
Why it is wrong: This confuses withholding with the final liability.
Option B. ₹1.60 lakh — Correct answer
Option C. ₹2.60 lakh
Why it is wrong: This adds withholding as if it were a second tax.
Option D. ₹4.00 lakh
Why it is wrong: This taxes returned capital even though the case excludes it.
Answer: B. Final tax = 20% × ₹8 lakh = ₹1.60 lakh. The ₹12 lakh capital return is excluded solely because the passage tells us to exclude it. Remember: Identify the taxable base before applying a rate.
Hint, shown before you answer in practice mode: Apply the assumed rate only to the stated taxable income.
XIXA-S2-C05-Q1easynumerical
Q2How much cash initially reaches the investor after withholding?
Option A. ₹18.40 lakh
Why it is wrong: This deducts the entire final liability rather than the initial withholding.
Option B. ₹19 lakh — Correct answer
Option C. ₹20 lakh
Why it is wrong: This ignores the withholding deducted from the distribution.
Option D. ₹7 lakh
Why it is wrong: This leaves out the returned capital from cash received.
Answer: B. Initial cash received = ₹20 lakh − ₹1 lakh withholding = ₹19 lakh. The final tax position must then be reconciled separately. Remember: Separate cash withholding from final tax liability.
Hint, shown before you answer in practice mode: Withholding is deducted from the total cash distribution.
XIXA-S2-C05-Q2easynumerical
Q3What additional tax remains payable after using the withholding credit?
Option A. ₹0.60 lakh — Correct answer
Option B. ₹1.60 lakh
Why it is wrong: This fails to credit the tax already withheld.
Option C. ₹2.60 lakh
Why it is wrong: This adds the credit instead of subtracting it.
Option D. ₹1.00 lakh
Why it is wrong: This is the credit already available.
Answer: A. Additional payment = ₹1.60 lakh final liability − ₹1 lakh credit = ₹0.60 lakh. A withholding credit prevents counting the same tax payment twice. Remember: Reconcile tax credits against final liability.
Hint, shown before you answer in practice mode: Subtract the credit from the final liability.
XIXA-S2-C05-Q3mediumnumerical
Q4What is the investor’s cash after the entire illustrated tax liability is settled?
Option A. ₹16.00 lakh
Why it is wrong: This applies the assumed rate to the entire distribution.
Option B. ₹19.00 lakh
Why it is wrong: This stops before the remaining ₹0.60 lakh is paid.
Option C. ₹18.40 lakh — Correct answer
Option D. ₹17.40 lakh
Why it is wrong: This subtracts both the full liability and withholding, double counting the credit.
Answer: C. After-tax cash = ₹20 lakh − ₹1.60 lakh = ₹18.40 lakh. Equivalently, initial cash of ₹19 lakh less the additional ₹0.60 lakh gives the same result. Remember: Withholding changes timing, not the final amount of tax in this example.
Hint, shown before you answer in practice mode: Deduct final tax once from the original distribution.
XIXA-S2-C05-Q4mediumnumerical
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