NISM Series X-B · Unit 3 of 6 · about 13% of the paper
Taxation: NISM Series X-B notes and practice questions
20 marks. Tax treatment of income and investments, and tax-efficient planning. Rates change; check the latest law.
What to know in Unit 3
- Heads of income.
- Capital gains.
- Deductions and regimes.
- Tax-efficient investing.
Key terms, examples and exam traps
Heads of income
Income is classified as salary, house property, business or profession, capital gains and other sources.
Example. Rent is taxed under house property.
Exam trap. This statement is false: All income is taxed under one head.
Residential status
Tax liability depends on residential status; residents are taxed on global income and non-residents on India-sourced income.
Example. An NRI is taxed on income earned in India.
Exam trap. This statement is false: Residents are taxed only on Indian income.
Old and new regime
Individuals can choose between the old regime with deductions and the new regime with lower slab rates and few deductions.
Example. A client with large deductions compares both.
Exam trap. This statement is false: Deductions like 80C apply under the new regime.
Section 80C
Section 80C allows a deduction up to ₹1.5 lakh for items such as PPF, ELSS, life insurance premiums and EPF in the old regime.
Example. A client invests in ELSS for deduction.
Exam trap. This statement is false: 80C allows unlimited deduction.
ELSS
Equity Linked Savings Schemes are tax-saving mutual funds with a three-year lock-in.
Example. A client chooses ELSS under 80C.
Exam trap. This statement is false: ELSS has a 15-year lock-in.
Section 80D
Section 80D allows a deduction for health insurance premiums, with higher limits for senior citizens, in the old regime.
Example. A client claims the premium paid for her parents.
Exam trap. This statement is false: 80D covers life insurance premiums.
Section 80CCD(1B)
An additional deduction of up to ₹50,000 is available for NPS contributions, over and above 80C, in the old regime.
Example. A client adds to NPS for extra deduction.
Exam trap. This statement is false: The extra deduction is ₹5 lakh.
Standard deduction
Salaried individuals get a flat standard deduction from salary income, and the amount differs by regime.
Example. A salaried person gets it without any proof.
Exam trap. This statement is false: The standard deduction needs bills.
Short-term capital gains on equity
Gains on listed equity shares and equity funds held up to 12 months are short term and taxed at a flat rate, currently 20%.
Example. A fund sold after 8 months.
Exam trap. This statement is false: Short-term gains on equity are taxed at 15% always.
Long-term capital gains on equity
Gains on listed equity held for more than 12 months are taxed at 12.5% on the amount above the annual exemption of ₹1.25 lakh.
Example. A holder sells after two years.
Exam trap. This statement is false: LTCG on equity is fully exempt.
Debt mutual funds
Debt funds bought after April 2023 are taxed on gains at the investor's slab rate, whatever the holding period.
Example. A debt fund gain is added to income.
Exam trap. This statement is false: Debt funds get indexation benefit.
Holding period for other assets
Unlisted shares and immovable property need two years to be long term, and long-term gains are taxed at 12.5% without indexation under current rules.
Example. A flat sold after 3 years.
Exam trap. This statement is false: Property is long term after one year.
Gold
Gold is long term after 24 months, with gains taxed at 12.5% under current rules, while gold funds follow their own rules.
Example. Physical gold sold after 3 years.
Exam trap. This statement is false: Gold is long term after one year.
Set-off and carry forward
Capital losses can be set off against capital gains and carried forward for eight years, but long-term losses only against long-term gains.
Example. A short-term loss reduces long-term gain.
Exam trap. This statement is false: Long-term loss offsets any income.
Dividend taxation
Dividends are taxed in the hands of the recipient at the slab rate.
Example. Dividend income is added to total income.
Exam trap. This statement is false: Dividends are tax-free for all investors.
Interest income
Interest from bank deposits is taxable at slab rates, with TDS above specified limits.
Example. FD interest is added to income.
Exam trap. This statement is false: FD interest is tax-free.
TDS
Tax deducted at source is a prepayment of tax by the payer and can be adjusted in the return.
Example. A bank deducts tax on interest.
Exam trap. This statement is false: TDS is a separate additional tax.
Advance tax
Taxpayers expecting liability above a threshold pay advance tax in instalments through the year.
Example. A business pays four times a year.
Exam trap. This statement is false: Advance tax is paid after the year ends.
Rental income
Rent is taxed under house property after a standard deduction of 30% of net annual value, plus home loan interest deduction subject to limits.
Example. A landlord claims a 30% deduction.
Exam trap. This statement is false: Rent is exempt from tax.
Home loan benefits
Interest on a home loan is deductible within limits for a self-occupied house, with principal repayment qualifying under 80C in the old regime.
Example. A borrower claims interest up to the limit.
Exam trap. This statement is false: There is no tax benefit from a home loan.
HUF
A Hindu Undivided Family is taxed as a separate entity, which allows another set of exemptions and slabs.
Example. A family splits income between itself and an HUF.
Exam trap. This statement is false: HUF is not a separate taxpayer.
Clubbing of income
Income from assets transferred to a spouse or minor child without adequate consideration is clubbed with the transferor's income.
Example. A gift to a spouse that earns interest is taxed in the giver's hands.
Exam trap. This statement is false: Gifts to a spouse always shift the tax.
Gifts
Gifts from specified relatives are exempt, while gifts from others above a threshold are taxed as income of the recipient.
Example. A gift from a parent is exempt.
Exam trap. This statement is false: All gifts are taxed.
Tax harvesting
Booking long-term gains up to the exemption limit each year and re-investing can reduce future tax.
Example. An investor sells units to use the annual exemption.
Exam trap. This statement is false: Tax harvesting avoids all tax.
Tax planning versus evasion
Planning uses legal provisions to reduce tax, while evasion hides income or misreports and is illegal.
Example. A client uses deductions properly.
Exam trap. This statement is false: Hiding income is tax planning.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Tax harvesting”?
- Booking long-term gains up to the exemption limit each year and re-investing can reduce future tax.
- The real return is the return after adjusting for inflation, roughly nominal less inflation.
- The bucket approach holds near-term needs in safe assets and long-term money in growth assets.
- Gifting during life transfers ownership immediately via a gift deed, and property gifts require registration.
Q2. Which term is described here? Planning uses legal provisions to reduce tax, while evasion hides income or misreports and is illegal.
- Retirement corpus
- Risk profile report and agreement
- Tax planning versus evasion
- Debt ratios
Q3. Which term is described here? Equity Linked Savings Schemes are tax-saving mutual funds with a three-year lock-in.
- Employees' Provident Fund
- ELSS
- Healthcare in retirement
- Standard deduction
Q4. Which statement best describes “Standard deduction”?
- A good plan first secures protection and removes costly debt before building long-term wealth.
- A power of attorney authorises another person to act for the principal during life and ends on the principal's death.
- The process is to identify risks, measure them, choose a treatment and monitor.
- Salaried individuals get a flat standard deduction from salary income, and the amount differs by regime.
Q5. Interest on a bank fixed deposit is taxed under which head of income?
- Income from house property
- Capital gains
- Income from other sources
- Salary
Q6. Which statement best describes “Section 80C”?
- Section 80C allows a deduction up to ₹1.5 lakh for items such as PPF, ELSS, life insurance premiums and EPF in the old regime.
- Salaried individuals get a flat standard deduction from salary income, and the amount differs by regime.
- Tax liability depends on residential status; residents are taxed on global income and non-residents on India-sourced income.
- A will must be in writing, signed by the testator and attested by two witnesses, and registration is optional.
Frequently asked questions
How much of NISM Series X-B comes from Unit 3?
Unit 3 (Taxation) usually carries about 13% of the questions. The whole exam has 120 questions and the pass mark is 60%.
What should I study in NISM Series X-B Unit 3?
Heads of income. Capital gains. Deductions and regimes. Tax-efficient investing.
Are these NISM Series X-B practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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