Accounting and Taxation of Interest Rate Derivatives
4 questions. Each answer is explained.
Question 1 of 4Practice · Series IV — Interest Rate Derivatives
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Learn these topics
More units in NISM Series IV
- Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market30
- Interest Rate Derivatives10
- Exchange Traded Interest Rate Futures20
- Exchange Traded Interest Rate Options22
- Strategies Using Exchange Traded Interest Rate Futures and Options24
- Trading Mechanism in Exchange Traded Interest Rate Derivatives10
- Clearing, Settlement and Risk Management of Interest Rate Derivatives16
- Regulatory Framework for Interest Rate Derivatives8
- Code of Conduct and Investor Protection Measures in Interest Rate Derivatives6
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 25% · 0.25 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 IV Interest Rate Derivatives
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 4 questions on Accounting and Taxation of Interest Rate Derivatives, with answers
Q1Under paragraph 6(ii) of the current RBI IRD Directions, which approach governs accounting for derivative contracts?
Option A. Recognise the full notional amount of every derivative trade as income on the same day the trade is done
Why it is wrong: Notional is not automatically earned income.
Option B. Follow the applicable notified accounting standards and regulator’s guidance, with ICAI guidance as fallback — Correct answer
Option C. Use cash accounting for every derivative contract, regardless of the entity’s own financial reporting framework
Why it is wrong: The direction does not prescribe that blanket approach.
Option D. Ignore all accounting requirements whenever the entity describes a derivative trade as a hedge
Why it is wrong: A hedging label does not remove reporting obligations.
Answer: B. The RBI direction points to notified applicable accounting standards and instructions from the entity’s respective regulator. Where the specified sources do not prescribe a standard, ICAI guidance, if any, is the fallback identified. The correct method therefore cannot be chosen solely from the product’s label or the trader’s preference. Remember: Identify the entity’s applicable accounting framework before choosing the treatment.
Hint, shown before you answer in practice mode: Common mistake: Assuming one simple accounting entry is mandatory for every entity and every derivative.
IV-141mediumregulatory
Q2For this question, a non-hedge derivative is measured at fair value through profit or loss. Its opening carrying amount is a ₹12,000 asset and its closing amount is a ₹7,000 liability. There are no intervening settlements. What is the period’s fair-value P/L?
Option A. A loss of ₹19,000 — Correct answer
Option B. A loss of ₹5,000
Why it is wrong: This subtracts liability magnitude from asset magnitude instead of recognising the sign change.
Option C. A gain of ₹5,000
Why it is wrong: This both mishandles signs and treats a deterioration as income.
Option D. A gain of ₹19,000
Why it is wrong: This reverses the direction of the movement.
Answer: A. Under the expressly supplied policy, the derivative’s signed carrying amount changes from +12,000 to −7,000. With no cash settlements to reconcile, the fair-value change is −7,000 − 12,000 = −₹19,000. This tests signed accounting arithmetic. It does not claim that every derivative, including a designated hedge, must use this treatment. Remember: A move from an asset to a liability crosses zero and includes both magnitudes in the loss.
Hint, shown before you answer in practice mode: Common mistake: Subtracting unsigned balances when the nature of the carrying amount changes.
IV-142mediumnumerical
Q3An entity’s stated policy records refundable cash margin as a collateral asset, separate from derivative P/L. It transfers ₹50,000 from its bank account as initial margin and no gain, loss or fee has yet arisen. Which entry follows that policy?
Option A. Leave bank cash unchanged and record ₹50,000 of income
Why it is wrong: Cash has actually left the bank account and no income has arisen.
Option B. Record a ₹50,000 trading loss solely because the cash was transferred
Why it is wrong: Under the supplied policy the refundable margin is collateral, not an immediate expense.
Option C. Recognise the contract’s entire notional as revenue
Why it is wrong: The notional does not represent revenue earned from posting collateral.
Option D. Increase the collateral asset by ₹50,000 and reduce bank cash by ₹50,000 — Correct answer
Answer: D. The question explicitly supplies the accounting presentation. Bank cash falls by ₹50,000 and refundable collateral rises by the same amount, so the transfer alone does not change profit. Subsequent variation payments, impairment, release or other events would require their own treatment under the applicable framework and are not assumed here. Remember: Distinguish collateral transfers from fees, derivative valuation changes and realised losses.
Hint, shown before you answer in practice mode: Common mistake: Automatically expensing every cash outflow connected with a trade.
IV-143mediumconceptual
Q4For this hypothetical tax computation only, all realised IRD trading gains are taxable, all realised trading losses and the stated expenses are deductible in the same period, and no other adjustments apply. Gains are ₹2,40,000, losses ₹90,000 and deductible expenses ₹10,000. What amount enters taxable income?
Option A. ₹1,40,000 — Correct answer
Option B. ₹1,50,000
Why it is wrong: This deducts trading losses but omits the eligible expenses.
Option C. ₹2,40,000
Why it is wrong: This ignores the deductions expressly permitted in the question.
Option D. ₹3,40,000
Why it is wrong: This adds losses and expenses instead of subtracting them.
Answer: A. The assumed taxable result is ₹2,40,000 − ₹90,000 − ₹10,000 = ₹1,40,000. This is not a statement about statutory classification, turnover, loss carry-forward or a tax rate. Those depend on applicable law and facts and were not independently established for this question. No tax payable is calculated because no rate is supplied. Remember: Compute a tax result only after identifying the rules or explicit assumptions governing deductions.
Hint, shown before you answer in practice mode: Common mistake: Confusing a stipulated practice calculation with verified current statutory tax treatment.
IV-144mediumnumerical
Accounting and Taxation of Interest Rate Derivatives: common questions
How many practice questions are there on Accounting and Taxation of Interest Rate Derivatives?
4 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 10 practice topics for NISM Series IV, which has 150 questions in total.
Are these real NISM Series IV questions on Accounting and Taxation of Interest Rate Derivatives?
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 IV?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 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.
Code of Conduct and Investor Protection Measures in Interest Rate Derivatives
6 questions on Code of Conduct and Investor Protection Measures in Interest Rate Derivatives. Its quiz opens on that unit.
Open Code of Conduct and Investor Protection Measures in Interest Rate Derivatives