NISM Series XX: Taxation in Securities Markets Certification Mock Test (Set 5)

Explanation:

Tax deducted at source (TDS) has been introduced to ensure a regular flow of revenue to the government. TDS is a mechanism through which tax is deducted at the source of income itself, ensuring that the government receives tax payments in a timely manner. It is deducted by the payer at the time of making certain payments such as salaries, interest, rent, commission, etc., and deposited with the government on behalf of the payee. By deducting tax at the source, the government ensures a steady stream of revenue and minimizes the possibility of tax evasion or default. Therefore, TDS plays a crucial role in ensuring the regular flow of revenue to the government.

Explanation:

Stamp duty is levied for transferring shares and securities from one person to another. It is a tax imposed by the state government on various transactions, including the transfer of shares and securities. When shares or securities are transferred between parties, a stamp duty is required to be paid on the transfer instrument, such as a share transfer deed or a contract note. The rate of stamp duty may vary depending on the state and the value of the transaction. Stamp duty revenue contributes to the state government’s revenue and is an essential source of income for state finances. Therefore, stamp duty is levied on the transfer of shares and securities to formalize and legalize the transaction and generate revenue for the government.

Explanation:

An options contract is a contract that gives the holder the right, but not the obligation, to buy or sell the underlying security on or before a specified date, at a stated price.

In an options contract, the buyer pays a premium to the seller for the right to exercise the option at a later date. The buyer can choose to exercise the option if it is advantageous, but is not obligated to do so. There are two types of options: call options, which give the holder the right to buy the underlying security, and put options, which give the holder the right to sell the underlying security.

Options contracts provide flexibility and allow investors to hedge risk or speculate on the future price movements of the underlying security without committing to a trade upfront.

Explanation:

The gain or loss arising from the transfer or redemption of debt instruments is classified as capital gains.

Explanation:

Income from a securitization trust in a specified fund is taxed under the head “Profits and gains from business.”

Explanation:

The taxability of securities issued by the employer depends on either the period of holding or the fair market value.

Explanation:

If PAN (Permanent Account Number) is furnished, the Tax Deducted at Source (TDS) applicable on brokerage shall be 5% for a resident person as per section 194H of the Income Tax Act. This section pertains to TDS on commission or brokerage. When a resident person receives brokerage or commission exceeding specified limits, TDS is required to be deducted at the rate of 5%, provided the PAN is furnished. If PAN is not furnished, the TDS rate is 20%. Therefore, furnishing PAN reduces the TDS rate to 5%.

Explanation:

The tax rate in the case of conversion of Global Depository Receipts (GDRs) into other securities would be the same as applicable at the time of the transfer of GDRs. This means that the tax implications remain consistent throughout the conversion process. Any capital gains or losses arising from the conversion of GDRs into other securities would be taxed at the same rate as applicable to the transfer of GDRs. Therefore, the statement is true.

Explanation:

Under Section 45(2A) of the Income Tax Act, the period of holding of securities held in demat form shall be determined as per the FIFO (First-In-First-Out) method.

This means that when determining the holding period for tax purposes, the securities that are sold first are considered to have been acquired first, following the FIFO method. This method helps in calculating the capital gains or losses accurately by matching the sale of securities with the corresponding acquisition dates. Therefore, Section 45(2A) specifies the method for determining the period of holding of securities held in demat form, which is the FIFO method.

Explanation:

During the lock-in period, no interest is paid in secured premium notes.

Secured premium notes typically have a lock-in period during which the investor cannot redeem or sell the notes. During this lock-in period, the issuer of the notes does not pay any interest to the investor. Interest payments usually commence after the lock-in period expires. This lock-in period is designed to provide stability to the issuer and ensure that investors commit their funds for a certain period, often to support specific projects or ventures.

Explanation:

As per Section 112 of the Income Tax Act, an assessee has the option to pay tax at the rate of 10% on long-term capital gains without indexation. This provision allows individuals to opt for a concessional tax rate of 10% on long-term capital gains arising from the transfer of specified assets like equity shares or mutual fund units, without availing the benefit of indexation.

Indexation is a method used to adjust the purchase price of an asset for inflation, thereby reducing the taxable capital gains. However, under Section 112, taxpayers can choose not to index their cost of acquisition and instead pay tax at the lower rate of 10% on the gains. This option provides simplicity and may be beneficial in certain scenarios where indexation results in negligible tax savings. Therefore, Section 112 grants taxpayers the option to avail of this concessional tax rate on long-term capital gains without indexation.

Explanation:

If a return is furnished, the Tax Deducted at Source (TDS) applicable for interest on securities for a resident person, as per Section 193 of the Income Tax Act, is 10%.

Section 193 pertains to the TDS on interest on securities. When a resident person receives interest on securities, such as debentures or government securities, exceeding specified limits, TDS is required to be deducted by the payer. If the recipient has furnished their PAN (Permanent Account Number) and a return of income, the TDS rate applicable is 10%. This rate may vary for non-resident recipients or if the recipient has not furnished their PAN. Therefore, for a resident person, the TDS rate is 10% if a return is furnished.

Explanation:

Dividend stripping is an attempt to reduce tax liability by an investor who invests in securities shortly before the record date. This strategy involves purchasing shares just before the dividend is declared and selling them shortly after receiving the dividend. The investor aims to benefit from the tax treatment of dividends, which are typically taxed at a lower rate than capital gains. By engaging in dividend stripping, investors can effectively convert part of their taxable capital gains into tax-favored dividends, thereby reducing their overall tax liability. However, tax authorities often implement measures to prevent abuse of this strategy.

Explanation:

A capital loss, whether short-term or long-term, cannot be set-off against income taxable under other sources such as salary or house property.

Explanation:

Yes, ICDS are only applicable for the computation of taxable income, not for the maintenance of books of account.

Explanation:

Equity-oriented high premium ULIPs invest their funds primarily in equity shares of listed domestic companies, typically around 65%. This allocation to equity provides potential for higher returns over the long term, aligning with the growth objectives of the policyholders.

Explanation:

Listed equity shares qualify as a long-term capital asset if held for a period of 12 months or more. This means that if you hold listed equity shares for at least 12 months before selling them, any resulting capital gains are treated as long-term capital gains, which may attract lower tax rates compared to short-term capital gains.

Explanation:

Warrants are indeed separately registered with the stock exchanges and traded separately. They represent a right to buy underlying securities at a predetermined price within a specified time frame. These warrants are listed and traded independently on the stock exchanges, allowing investors to buy and sell them just like any other security.

Explanation:

Stock in trade refers to goods or merchandise held by a business for sale in the ordinary course of business. It is considered a part of the trading inventory and is not categorized as a capital asset. Capital assets typically include assets held for investment purposes, such as land, buildings, machinery, and investments in stocks or bonds. Therefore, stock in trade is not included in capital assets.

Explanation:

In the case of inflation-indexed bonds, taxpayers have the option to pay tax at the rate of 10% on long-term capital gains without indexation. This concessional tax rate allows taxpayers to potentially reduce their tax liability on long-term capital gains, providing an incentive for investment in inflation-indexed bonds.

Explanation:

Commodity trading is indeed allowed on the International Financial Services Centre (IFSC) stock exchange. The IFSC stock exchange provides a platform for trading various financial instruments, including equities, derivatives, currencies, and commodities. Therefore, the statement that commodity trading is not allowed on the IFSC stock exchange is false.

Explanation:

The statement is false. While tax-free bonds offer interest income that is exempt from tax, any capital gains arising from the transfer or redemption of tax-free bonds are indeed chargeable to tax. These capital gains are treated similar to capital gains from other securities and are subject to tax according to the applicable provisions of the Income Tax Act. Therefore, the capital gains arising on the transfer or redemption of tax-free bonds are not exempt from tax.

Explanation:

The statement is false. A foreign company can be treated as a resident in India if its Place of Effective Management (POEM) is located in India during the relevant previous year. The concept of POEM determines the residential status of a foreign company for tax purposes in India. If the POEM of a foreign company is considered to be in India, it will be treated as a resident in India and will be subject to tax on its global income in India. Therefore, the residence status of a foreign company is determined based on the location of its POEM, and if its POEM is in India, it will be treated as a resident in India.

Explanation:

For coupon bonds listed on a recognized stock exchange, the period of holding to qualify as a long-term capital asset is greater than 12 months. If an investor holds coupon bonds for more than 12 months before selling them, any resulting capital gains are treated as long-term capital gains, which may attract lower tax rates compared to short-term capital gains. Therefore, to qualify for the benefits of long-term capital gains taxation, an investor must hold coupon bonds for more than 12 months.

Explanation:

Explanation:

Marked to premium loss is the process of recognizing unrealized loss in respect of securities held as stock-in-trade at the end of the previous years. This term refers to the adjustment made to the value of securities to reflect their market value at the end of the accounting period. If the market value of the securities held as stock-in-trade is lower than their cost, a marked to premium loss is recognized to reflect the unrealized loss. This adjustment helps in providing a more accurate representation of the financial position of the business and ensures proper valuation of stock-in-trade.

Explanation:

The Finance Act, 2020 amended section 192 to reduce the burden of taxes primarily concerning TDS (Tax Deducted at Source) on salary. This amendment introduced various changes aimed at providing relief to taxpayers and simplifying the tax compliance process, such as new tax regimes and higher thresholds for tax deductions.

Explanation:

In the Income-tax Act, income is computed under various heads, including Property, Capital gain, Profession, and others. Each head represents different sources of income, and the taxpayer’s total income is computed by aggregating income from all these heads. Therefore, all the options provided (Property, Capital gain, Profession) are correct as income can be computed under each of these heads as per the provisions of the Income-tax Act.

Explanation:

Research analysts typically make buy/sell/hold recommendations regarding securities or investments. These professionals analyze various factors such as market trends, financial performance, industry conditions, and company fundamentals to provide insights and recommendations to investors. Their recommendations help investors make informed decisions about buying, selling, or holding particular securities in their portfolios.

Explanation:

Long-term capital losses can be offset through intra-head adjustment of loss within the same head of income and by carrying forward the losses to future years. Intra-head adjustment allows taxpayers to offset long-term capital losses against long-term capital gains within the same head of income. Additionally, taxpayers can carry forward the remaining losses to subsequent years and set them off against any capital gains they may have in those years. This helps in optimizing tax planning and reducing the tax burden over time.

Explanation:

Perpetual debentures are issued subject to redemption on the happening of specified events that may not occur for an indefinite period. Unlike redeemable debentures, which have a fixed maturity date, perpetual debentures do not have a specific redemption date and may remain outstanding indefinitely. These debentures provide the issuer with flexibility in terms of repayment and may be redeemed based on certain predefined events, such as a change in control or the occurrence of specific business milestones.

Explanation:

Alternative Investment Funds (AIFs) are covered under both SEBI (Mutual Funds) Regulations, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999. These regulations provide a regulatory framework for the establishment, operation, and regulation of AIFs in India. AIFs are distinct from mutual funds and collective investment schemes and are subject to specific regulations aimed at ensuring investor protection and market integrity.

Explanation:

If a corporate issues External Commercial Borrowings (ECBs) under the approval route for Masala bonds, they would require permission from the Reserve Bank of India (RBI). Masala bonds are rupee-denominated bonds issued by Indian entities in overseas markets, and they require RBI approval due to their unique nature of raising funds in foreign currency but denominated in Indian rupees. This permission ensures regulatory oversight and compliance with foreign borrowing regulations.

Explanation:

According to SEBI guidelines, both financial institutions and stockbrokers are eligible to act as depository participants. Depository participants play a crucial role in the securities market by providing services related to the dematerialization, transfer, and settlement of securities. Financial institutions and stockbrokers are well-equipped to perform these functions efficiently, making them eligible to act as depository participants under SEBI regulations.

Explanation:

GAAR (General Anti-Avoidance Rules) is an anti-tax avoidance regulation codified in the Income Tax Act to counter aggressive tax planning arrangements. It empowers tax authorities to disregard any transaction or arrangement that lacks commercial substance or is undertaken primarily to obtain a tax benefit. GAAR aims to prevent taxpayers from exploiting loopholes in tax laws and engaging in artificial or abusive tax avoidance schemes.

Explanation:

The Finance Act, 2020 amended Section 156 of the Income Tax Act to reduce the burden of taxes by addressing the process related to notice of demand. This amendment aims to streamline and enhance the efficiency of tax administration by providing clarity and procedural improvements regarding the issuance of notices of demand to taxpayers.

Explanation:

Indexation benefit is allowed while computing capital gains on bonds. Indexation adjusts the purchase price of the asset for inflation, which reduces the taxable capital gains and, consequently, the tax liability. This provision aims to account for the effect of inflation on the investment and ensures that taxpayers are not unduly taxed on gains that are merely due to inflation.

Explanation:

Currency derivatives are exchange-based futures and options contracts that allow hedging against currency movements. Hedging involves using financial instruments to offset or mitigate the risk of adverse price movements in an underlying asset, in this case, currency exchange rates. Currency derivatives help businesses and investors manage their exposure to currency fluctuations by locking in exchange rates for future transactions, thereby reducing the impact of currency volatility on their finances.

Explanation:

Under Section 191 of the Income Tax Act, a person who was liable for deduction of tax at source but fails to deduct it, or after deduction fails to pay such tax, shall be considered as an assessee-in-default. This provision ensures that the responsibility for deducting and remitting taxes at source is enforced, and failure to fulfill this obligation results in the person being treated as defaulting on their tax obligations.

Explanation:

Derivatives are financial products whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, currencies, or market indices. These financial instruments derive their value from the performance of an underlying asset, but they themselves do not represent ownership of that asset. Derivatives include various instruments like futures contracts, options, swaps, and forwards, which allow investors to hedge risk, speculate on price movements, or gain exposure to different asset classes without owning the underlying asset directly.

Explanation:

Long-term capital gains arising from the sale of equity shares are taxable at a rate of 20% if they are not eligible for exemption under section 112A of the Income Tax Act. This rate applies to gains exceeding the specified exemption limit and is applicable in cases where the gains are not covered under any other special provisions for lower taxation rates.

Explanation:

If the Securities Transaction Tax (STT) is not applicable, long-term capital gains on equity shares and equity-oriented mutual funds are taxed at a rate of 10% without indexation plus applicable surcharge and cess. However, as of the Finance Act, 2018, a 10% tax on long-term capital gains exceeding ₹1 lakh from equity shares or equity-oriented mutual funds is applicable. This tax rate is applicable if STT is not paid at the time of transfer

Explanation:

The Institute of Chartered Accountants of India (ICAI) prescribes the method of determining turnover for various purposes, including taxation and auditing. This turnover calculation typically includes the total of favorable and unfavorable differences as well as the premium received on the sale of options. These components are considered essential in determining the overall turnover of a business or individual for reporting and compliance purposes.

Explanation:

Under Section 2(14) of the Income-tax Act, the term “capital asset” is defined. This definition encompasses various types of property or assets held by an individual or business, including land, buildings, machinery, vehicles, investments such as stocks and bonds, and personal items like jewelry. Understanding this definition is crucial for determining the tax treatment of gains or losses arising from the transfer or disposal of such assets.

Explanation:

Interest on rupee-denominated bonds of an Indian company, when received by a Foreign Portfolio Investor (FPI), is chargeable to tax at the rate of 5 percent. This provision is aimed at attracting foreign investment in Indian companies through the issuance of such bonds by providing a favorable tax treatment on the interest income earned by FPIs.

Explanation:

Section 60 of the Income Tax Act has no application when assets producing income are transferred along with the income. This section deals with the transfer of income without transferring the assets generating that income. Therefore, if both the assets and the income they produce are transferred together, Section 60 is not applicable.

Explanation:

In the case of an FPI being an investment division of an offshore banking unit, certain income shall be exempt from tax by virtue of Section 10(4D). This provision grants tax exemption to income earned by offshore banking units from specified transactions, including income from securities transactions carried out by their investment divisions.

Explanation:

A depreciable asset will always be treated as a short-term capital asset because the holding period for such assets is typically less than 36 months. According to the Income Tax Act, any asset held for 36 months or less is considered a short-term capital asset. Since depreciable assets are generally used in business operations and subject to depreciation, they are typically held for shorter periods, making them short-term capital assets for tax purposes.

Explanation:

The comparison of actual cost and net realizable value is done for each category of assets or securities. This approach allows for a systematic evaluation of the financial health and performance of different asset categories, ensuring a comprehensive understanding of the overall financial position of the entity. It enables management to make informed decisions regarding the valuation and management of assets based on their specific characteristics and market conditions.

Explanation:

Masala bonds are rupee-denominated bonds issued by Indian companies in overseas markets. They protect Indian companies from currency risk because the denomination of the bonds is in Indian rupees, which means the repayment obligations are in rupees rather than in a foreign currency. This shields the issuing company from fluctuations in exchange rates, reducing the risk associated with currency depreciation or appreciation.