Unit study guide · NISM Series XXI-B
Taxation
6 questions in this unit
What this unit covers
- Which status helps determine the geographic scope of an investor’s taxable income?
- A bond makes its scheduled coupon payment to the holder. Which economic income stream does this represent?
- An investment bought for ₹2,00,000 is sold for ₹2,40,000. Ignoring tax and charges, what is the realised economic gain?
- A statement shows a dividend receipt of ₹9,000 after ₹1,000 tax withholding. What gross dividend amount does the statement imply?
- What is a central purpose of a Double Tax Avoidance Agreement between two countries?
- For a hypothetical comparison, A earns 12% taxed at 30% and B earns 10% taxed at 10%. Which after-tax return is higher?
Key ideas
From the practice bank · 1
Which status helps determine the geographic scope of an investor’s taxable income?
Tax residential status helps determine which income falls within a country’s tax scope. The applicable legal tests must be checked rather than inferred only from citizenship. Remember: Tax residence and citizenship are not automatically the same.
Hint Separate a person’s tax connection with a country from investment preferences. Common mistake: Using nationality alone to decide the taxation of worldwide income.
XXI-B-057From the practice bank · 2
A bond makes its scheduled coupon payment to the holder. Which economic income stream does this represent?
A scheduled coupon is interest income because it compensates the holder under the debt contract. It is distinct from principal repayment or a gain on disposal. Remember: Separate interest receipts from disposal gains and principal repayments.
Hint Identify what the bond contract pays for the use of borrowed money. Common mistake: Calling every cash receipt from an investment a .
XXI-B-058From the practice bank · 3
An investment bought for ₹2,00,000 is sold for ₹2,40,000. Ignoring tax and charges, what is the realised economic gain?
The realised economic gain is ₹40,000 because proceeds exceed cost by that amount. Working: ₹2,40,000 − ₹2,00,000 = ₹40,000. This calculation does not determine the applicable tax treatment or tax rate. Remember: Sale proceeds and the gain on a sale are different amounts.
Hint Distinguish return of the original capital from an increase over it. Common mistake: Applying a tax rate directly to total sale proceeds without identifying the relevant tax base.
XXI-B-059From the practice bank · 4
A statement shows a dividend receipt of ₹9,000 after ₹1,000 tax withholding. What gross dividend amount does the statement imply?
The gross dividend is ₹10,000 because it includes both the cash received and the amount withheld. Working: ₹9,000 + ₹1,000 = ₹10,000. The withholding amount is a case input, not an assertion of a current statutory rate. Remember: Net cash received can differ from the gross income shown for tax reporting.
Hint Reconstruct the amount before the deduction shown on the statement. Common mistake: Treating net cash as the entire gross income.
XXI-B-060From the practice bank · 5
What is a central purpose of a Double Tax Avoidance Agreement between two countries?
A Double Tax Avoidance Agreement provides agreed rules and relief where countries’ taxing claims overlap. Eligibility and the relevant treaty article must be checked for the specific income. Remember: Treaty relief is conditional and income-specific rather than automatic.
Hint Think about income that has a tax connection with more than one country. Common mistake: Assuming a foreign income source means the income is tax-free.
XXI-B-061From the practice bank · 6
For a hypothetical comparison, A earns 12% taxed at 30% and B earns 10% taxed at 10%. Which after-tax return is higher?
B has the higher after-tax return by 0.60 percentage points under the stated hypothetical assumptions. A retains 12% × (1 − 0.30) = 8.40%. B retains 10% × (1 − 0.10) = 9.00%. Difference = 9.00% − 8.40% = 0.60 percentage points. These rates are invented case assumptions and are not current Indian tax rates. Remember: A higher pre-tax return need not be a higher after-tax return.
Hint Calculate the retained return on each investment separately. Common mistake: Ranking investments by gross return without applying the stated tax assumptions.
XXI-B-062A capital gain is the gain from selling an asset for more than its eligible cost.
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