Taxation – India specific
8 questions. Each answer is explained.
Question 1 of 8Practice · Series XIX-A — Alternative Investment Funds (Category I and II) Distributors
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Learn these topics
More units in NISM Series XIX-A
- Overview of Alternative Investments7
- Alternative Investment Funds in India7
- Concepts in Alternative Investment Funds Industry7
- Regulatory Framework – Indian Context15
- Alternative Investment Fund Structuring15
- Risk and Return – Investor and Fund Perspective15
- Investment Process and Governance of Funds15
- Fund Due Diligence – Investor Perspective23
- Legal Documents and Negotiations – Investor Perspective15
- Fund Monitoring, Reporting and Exit7
- Valuation8
- Good Practices8
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | 5 of 100 marks (5%) |
Source: 19 March 2025 Annexure I, Unit 12: Taxation – India specific
NISM Series XIX-A Alternative Investment Funds (Category I and II) Distributors
Exam rules read on NISM's site on 29 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 29 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 8 questions on Taxation – India specific, with answers
Q1What does tax pass-through generally mean for qualifying non-business income of a Category I or II investment fund?
Option A. The income is permanently exempt for every fund and investor
Why it is wrong: Pass-through determines who is taxed and does not imply that every investor receives a permanent exemption.
Option B. Every unit holder must pay exactly the same rupee amount of tax
Why it is wrong: Investor entitlements and tax circumstances can differ.
Option C. Income is attributed to unit holders under the applicable tax rules — Correct answer
Option D. The manager may choose any tax rate stated in its presentation
Why it is wrong: A manager’s presentation cannot replace the rates and treatment required by tax law.
Answer: C. Pass-through generally attributes qualifying income to unit holders for tax treatment as if they had made the underlying investments directly. It does not mean that the income is automatically tax-free. Remember: Tax pass-through is not a universal tax exemption.
Hint, shown before you answer in practice mode: Distinguish passing income to investors for tax purposes from making the income tax-free. Common mistake: Using pass-through and tax-free as if they meant the same thing.
XIX-A-135easyregulatory
Q2Under section 224, where does a qualifying investment fund’s unabsorbed business loss remain for carry-forward and set-off?
Option A. At the unit-holder level automatically in proportion to their units
Why it is wrong: The provision excludes the fund’s business loss from this unit-holder pass-through treatment.
Option B. At the investment fund level, subject to the applicable rules — Correct answer
Option C. Nowhere, because all fund business losses are permanently cancelled
Why it is wrong: The provision allows the fund-level business loss treatment under the relevant carry-forward and set-off rules.
Option D. At the unit-holder level once every investor completes twelve months
Why it is wrong: The twelve-month condition concerns other losses and does not turn a business loss into a passed-through loss.
Answer: B. The unabsorbed business loss remains at the investment fund level for carry-forward and set-off under the applicable rules. It is ignored for the unit-holder pass-through treatment in section 224(1). Remember: Business losses do not automatically pass through to unit holders.
Hint, shown before you answer in practice mode: Check whether business losses follow the same path as qualifying pass-through income. Common mistake: Assuming that all fund losses follow exactly the same treatment as all fund income.
XIX-A-136easyregulatory
Q3When qualifying investment-fund income passes to a unit holder, what happens to its tax character under section 224(5)?
Option A. It always becomes a tax-free repayment of subscribed capital
Why it is wrong: An income allocation is not automatically a return of the investor’s original capital.
Option B. It retains the relevant nature and proportion of the underlying income — Correct answer
Option C. It always becomes a dividend regardless of its underlying source
Why it is wrong: The provision preserves the income’s nature rather than reclassifying every component as a dividend.
Option D. It always becomes salary income in the investor’s hands
Why it is wrong: An allocation from an investment fund does not automatically turn into employment income.
Answer: B. The income retains its relevant nature and proportion under the statutory pass-through treatment. Receiving it through a fund does not automatically turn every component into the same kind of income. Remember: The underlying type of income remains relevant at the investor level.
Hint, shown before you answer in practice mode: Follow the underlying income category through the investment-fund layer. Common mistake: Treating every fund distribution as the same tax category.
XIX-A-137mediumregulatory
Q4When covered fund income is neither paid nor credited during the tax year, when does section 224(7) generally deem it credited?
Option A. On the last day of that tax year — Correct answer
Option B. Only when the investor sells every fund unit
Why it is wrong: The provision does not depend on the unit holder first selling all units.
Option C. On a date selected freely by the distributor
Why it is wrong: The credit date follows the statute rather than the distributor’s preference.
Option D. Only when the fund eventually closes permanently
Why it is wrong: The deeming rule does not wait until the fund has been wound up.
Answer: A. Covered income is generally deemed credited on the last day of that tax year in the investor’s entitlement proportion. Actual cash distribution is not the only event relevant to taxation. Remember: Taxable attribution can occur before cash is distributed.
Hint, shown before you answer in practice mode: Consider the statutory timing rule rather than waiting only for a bank receipt. Common mistake: Assuming that no tax-related income can arise until money reaches the bank account.
XIX-A-138mediumregulatory
Q5What information must the prescribed investment-fund statement include under section 224(9)?
Option A. Only the fund's combined net asset value as measured at the end of the year
Why it is wrong: Year-end portfolio value is not a substitute for the required information about income.
Option B. Only the investor's paid-in capital and the part of the commitment still unpaid
Why it is wrong: Capital obligations do not provide the prescribed details about income paid or credited.
Option C. Only the cash amount distributed to the investor after deducting any withholding
Why it is wrong: Net cash alone does not disclose the nature of the income paid or credited.
Option D. Details of the nature of income paid or credited and prescribed particulars — Correct answer
Answer: D. The prescribed statement must provide the nature of income paid or credited and the other required particulars. A cash total alone may not identify the correct tax treatment. Remember: Keep the prescribed income statement, not only evidence of the bank receipt.
Hint, shown before you answer in practice mode: Focus on the information needed to identify the income’s tax treatment. Common mistake: Assuming that a bank credit description contains every detail needed for tax reporting.
XIX-A-139mediumregulatory
Q6What is the broad purpose of the Foreign Account Tax Compliance Act and Common Reporting Standard frameworks?
Option A. Replacing the need for a fund to establish the investor's country of tax residence
Why it is wrong: Tax residence and related identifying information remain relevant rather than unnecessary.
Option B. Supporting cross-border tax transparency through financial-account information — Correct answer
Option C. Granting all non-resident investors an automatic exemption from tax on Indian income
Why it is wrong: These frameworks do not create a universal exemption for non-residents.
Option D. Guaranteeing profitable outcomes for every investment made through an offshore fund
Why it is wrong: Tax information frameworks do not guarantee investment returns.
Answer: B. These frameworks support cross-border tax transparency through financial-account information and reporting. They are not investment guarantees or blanket tax exemptions. Remember: Tax-residence information can be needed for international financial-account reporting.
Hint, shown before you answer in practice mode: Think about why financial institutions ask for tax-residence information. Common mistake: Treating international account reporting as a form of investment approval.
XIX-A-140mediumconceptual
Q7A unit holder has already included a particular ₹3 lakh fund-income amount in taxable income when it accrued. The fund pays exactly that previously included amount in a later tax year. Under section 224(8), how is that same income treated on payment?
Option A. It is not included again solely because the fund now pays it — Correct answer
Option B. It is deducted from unrelated salary income as a new investment loss
Why it is wrong: Receiving previously included income does not create the stated new investment loss.
Option C. It becomes a new capital gain solely because the calendar year changed
Why it is wrong: A later payment date does not automatically create a fresh capital gain on the same already-included income.
Option D. It must be included a second time because cash has now arrived
Why it is wrong: The provision prevents reinclusion of the same income merely because actual payment occurs later.
Answer: A. The same income is not included again merely because it is paid in a later tax year. Section 224(8) prevents that repeated inclusion where the stated conditions are met. Remember: Distinguish later payment of existing income from a new income event.
Hint, shown before you answer in practice mode: Track whether this exact income amount has already entered taxable income. Common mistake: Taxing the same amount twice by treating accrual and later payment as separate income.
XIX-A-141hardapplication
Q8A non-resident investor asks for a tax-treaty benefit on Indian income. The investor provides only a foreign passport, without the required tax-residence evidence or other prescribed information. What should be checked before applying the claimed benefit?
Option A. Treaty eligibility, tax-residence evidence and applicable documentation conditions — Correct answer
Option B. The fund's target return, on the basis that this alone decides the investor's treaty eligibility
Why it is wrong: Expected investment performance does not determine eligibility for treaty relief.
Option C. The investor's citizenship alone, on the basis that it always proves treaty tax residence
Why it is wrong: Nationality does not automatically establish treaty tax residence or every condition for relief.
Option D. The investor's preferred tax rate, on the basis that treaty rates can be chosen freely
Why it is wrong: The investor cannot choose a rate without meeting the applicable treaty and legal conditions.
Answer: A. Treaty eligibility and the required tax-residence evidence and documentation must be checked. A foreign passport alone does not establish every condition for the claimed relief. Remember: A treaty claim depends on legal eligibility and supporting evidence.
Hint, shown before you answer in practice mode: Distinguish nationality from the tax-residence and eligibility tests. Common mistake: Using citizenship as a substitute for establishing tax residence and treaty conditions.
XIX-A-142hardapplication
Taxation – India specific: common questions
How many practice questions are there on Taxation – India specific?
8 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 13 practice topics for NISM Series XIX-A, which has 150 questions in total.
Are these real NISM Series XIX-A questions on Taxation – India specific?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
How much of the NISM Series XIX-A exam is Taxation – India specific?
NISM's published syllabus outline gives it 5 of the paper's 100 marks, or 5% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: 19 March 2025 Annexure I, Unit 12: Taxation – India specific
Does negative marking apply to NISM Series XIX-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Good Practices
8 questions on Good Practices. Its quiz opens on that unit.
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