Taxation
7 questions. Each answer is explained.
Question 1 of 7Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Performance Measurement and Evaluation of Portfolio Managers15
- Regulatory, Governance and Ethical Aspects of Portfolio Managers15
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 | Not published by NISM |
NISM Series XXI-A Portfolio Management Services (PMS) Distributors
Exam rules read on NISM's site on 3 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 3 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 7 questions on Taxation, with answers
Q1Two investors hold similar securities through PMS, but one is a resident individual and the other is a non-resident company. What should happen before applying a tax calculation?
Option A. Apply one flat PMS tax rate to both investors without asking for any further information.
Why it is wrong: The service label alone does not specify all investor-level tax consequences.
Option B. Assume that using the same manager makes both investors resident individuals for tax.
Why it is wrong: Using one service provider does not change legal form or residence status.
Option C. Establish each investor’s status, income type and the rules that apply for that period. — Correct answer
Option D. Use the distributor’s own personal tax rate for both clients’ tax calculations.
Why it is wrong: The distributor’s status does not determine the clients’ liabilities.
Answer: C. Tax assessment depends on the investor, the character of income and the applicable legal period, not only the investment channel. Identify residence, legal form and the relevant transaction and income categories. Apply verified rules for the relevant period and circumstances. Do not infer a universal tax rate from the fact that investments are managed through PMS. Remember: Identify the taxpayer and income type before applying a tax rate.
Hint, shown before you answer in practice mode: Common mistake: Assuming that every PMS client has the same tax treatment.
XXI-A-129easyapplication
Q2For this question only, taxable interest is ₹80,000 and the final tax rate is 25%. Creditable tax already withheld is ₹8,000. With no other credits or levies, what additional tax remains payable?
Option A. ₹28,000
Why it is wrong: This adds withholding to the liability instead of treating it as a payment credit.
Option B. ₹20,000
Why it is wrong: This is the liability before crediting the tax already withheld.
Option C. ₹12,000 — Correct answer
Option D. ₹0
Why it is wrong: Withholding does not automatically equal or extinguish the final liability.
Answer: C. Tax withholding is a collection mechanism. The final liability must be calculated and reconciled with valid credits. Final tax = ₹80,000 × 25% = ₹20,000. Additional payable = ₹20,000 − ₹8,000 = ₹12,000. The rate and full credit eligibility are expressly hypothetical. Remember: Calculate final liability first, then deduct eligible tax credits.
Hint, shown before you answer in practice mode: Common mistake: Treating the withholding amount as the final tax or as an extra tax.
XXI-A-130mediumnumerical
Q3Assume an investment is taxed on realised gains when sold. Securities costing ₹4 lakh are sold for ₹4.6 lakh, and all proceeds stay in the PMS cash account. With no deductible costs, what gain is realised under this supplied rule?
Option A. ₹4,00,000
Why it is wrong: This reports the cost rather than the gain realised on sale.
Option B. ₹4,60,000
Why it is wrong: This treats all proceeds, including original cost, as gain.
Option C. ₹0 until the client withdraws the cash
Why it is wrong: That substitutes a withdrawal-based rule for the explicitly stated sale-based rule.
Option D. ₹60,000 — Correct answer
Answer: D. Realisation, account cash movement and withdrawal by the investor are separate events under the stated tax assumption. The securities have been sold, so the supplied realisation condition is satisfied. Gain = ₹4,60,000 − ₹4,00,000 = ₹60,000. Retaining the proceeds in the account does not undo the sale under that assumption. Remember: Distinguish investment realisation from movement of the resulting cash.
Hint, shown before you answer in practice mode: Common mistake: Assuming that no withdrawal necessarily means no realised gain.
XXI-A-131mediumnumerical
Q4For this question, sale proceeds are ₹1,20,000 and acquisition cost is ₹1,00,000. A ₹500 selling charge is deductible, but a ₹1,000 management fee is not deductible in this gain calculation. What taxable gain follows?
Option A. ₹18,500
Why it is wrong: This also deducts the management fee despite the supplied exclusion.
Option B. ₹20,500
Why it is wrong: This adds the selling charge instead of deducting it.
Option C. ₹19,500 — Correct answer
Option D. ₹20,000
Why it is wrong: This ignores the allowed selling-charge deduction.
Answer: C. An economic expense and a tax-allowable deduction are not automatically the same thing. Gain before allowed charges = ₹1,20,000 − ₹1,00,000 = ₹20,000. Deduct the permitted ₹500 selling charge to obtain ₹19,500. Do not deduct the ₹1,000 fee because the question expressly excludes it. Remember: Apply the stated tax classification of costs rather than deducting every economic expense.
Hint, shown before you answer in practice mode: Common mistake: Assuming that a fee reducing portfolio value is always deductible in the same tax computation.
XXI-A-132hardnumerical
Q5Which information set is most useful for reconciling a client’s investment tax reporting?
Option A. Only the amount of the client’s first contribution into the portfolio
Why it is wrong: Later transactions and income may affect reporting and cannot be reconstructed from the first contribution alone.
Option B. Only the annual return that the manager advertises in its marketing for this approach
Why it is wrong: An aggregate advertised return is not an investor-specific tax ledger.
Option C. Only the portfolio’s ending market value on the year-end statement
Why it is wrong: An ending value does not identify realised transactions, income categories or credits.
Option D. Transaction dates, costs, sale proceeds, income details and eligible tax-credit records — Correct answer
Answer: D. Tax records must explain the transactions and income being reported, not just the value of the investment account. Reconcile buys, sells and income with the underlying statements and supporting documents. Identify costs, dates, classifications and credits applicable to the investor. Resolve differences before using a summary in a return. Remember: Keep a transaction-level audit trail rather than relying only on performance summaries.
Hint, shown before you answer in practice mode: Common mistake: Using NAV or portfolio return as a substitute for tax-reporting data.
XXI-A-133easyapplication
Q6For a particular client and period, assume verified tax advice classifies the specified derivative-trading result as business income. How should a reporting preparer treat it?
Option A. Label it a long-term capital gain just because the client has held the PMS account for several years.
Why it is wrong: The age of the service account does not override the supplied classification of the transactions.
Option B. Leave it out of the report if the manager has already reinvested the resulting cash.
Why it is wrong: Reinvestment does not by itself remove the need to report the classified income.
Option C. Treat every derivative receipt as tax-exempt because margin was paid on the trades.
Why it is wrong: Posting margin does not establish a tax exemption.
Option D. Use that classification and its computation rules, rather than automatically calling it a capital gain. — Correct answer
Answer: D. Investment-channel labels and account age do not substitute for determining the character of a particular income item. Use the verified classification expressly given in the scenario. Apply the corresponding computation and reporting rules for that client and period, without importing capital-gain treatment from unrelated transactions. Remember: Classify the income item before applying the relevant tax computation.
Hint, shown before you answer in practice mode: Common mistake: Assigning every PMS transaction to capital gains automatically.
XXI-A-134mediumapplication
Q7An NRI’s onboarding file refers to both a bank-linked Portfolio Investment Scheme arrangement and a PMS agreement. What should the distributor avoid assuming?
Option A. That the PMS agreement should explain who makes the investment decisions for the account
Why it is wrong: Decision authority is a central service term that should be understood.
Option B. That the applicable banking and investment permissions need to be checked for this investor
Why it is wrong: Such checks remain relevant to the particular investor and transaction route.
Option C. That tax status and reporting may need to be verified separately from the bank route
Why it is wrong: Those matters are not settled merely by the existence of a bank-linked route.
Option D. That the bank-linked route automatically decides whether PMS decisions are discretionary — Correct answer
Answer: D. Similar labels can refer to different arrangements. An investment route is not the same as a contract delegating investment decisions. Separate the bank-linked route and its applicable conditions from the PMS service agreement. Then establish investor status, permissions, account arrangements and decision authority from the relevant documents. Do not infer one from the name of the other. Remember: Distinguish the route through which investments are made from the authority to manage them.
Hint, shown before you answer in practice mode: Common mistake: Treating PIS and PMS as interchangeable service descriptions.
XXI-A-135mediumapplication
Taxation: common questions
How many practice questions are there on Taxation?
7 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Taxation?
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.
Does negative marking apply to NISM Series XXI-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.
Regulatory, Governance and Ethical Aspects of Portfolio Managers
15 questions on Regulatory, Governance and Ethical Aspects of Portfolio Managers. Its quiz opens on that unit.
Open Regulatory, Governance and Ethical Aspects of Portfolio Managers