Taxation for NISM certification
Tax changes the return an investor actually keeps. This chapter explains how mutual fund schemes are classified for tax, how capital gains and IDCW are taxed, and the special rules (losses, stripping, ELSS, NRIs) a distributor should know. All rates are as of Nov 2026: check the latest Finance Act before advising.
Mutual FundsSeries V-A61 MCQs5 lessons18 flashcards5 memory tricks
What you'll learn
- Three tax buckets
Put any scheme into the right tax bucket. - Computing capital gains
Calculate short- and long-term gains and the tax. - IDCW, TDS and STT
Explain how IDCW is taxed and which taxes are deducted at source. - Losses, stripping and switches
Apply the set-off rules and spot stripping transactions. - ELSS and investors from abroad
Explain the ELSS deduction and the special points for NRIs.
Key formulas
| Capital gain | Redemption value − cost of acquisition (purchase value) |
|---|---|
| Equity LTCG tax | 12.5% × (total equity LTCG in the year − ₹1.25 lakh) |
| Equity STCG tax | 20% × STCG |
| Holding (equity) | Long-term if held more than 12 months |
Concepts explained
Tax buckets for mutual funds
For tax, schemes are equity-oriented (65%+ listed domestic equity), specified (65%+ debt, bought from April 2023: always slab rate) or other (everything else).
What it means
- Equity: long-term after 12 months; STCG 20%; LTCG 12.5% above ₹1.25 lakh.
- Specified debt: slab rate, whatever the holding period.
- Other: long-term after 24 months (12 if listed); STCG slab; LTCG 12.5%.
- Hybrid fund with 45% equity
- Not 65% equity; not more than 65% debt
- Neither equity-oriented nor specified
Answer: Other bucket
Related terms
- Indexation: inflation adjustment of cost, removed for transfers from 23 July 2024
Exam tip: All rates as of Nov 2026 (after the 23 July 2024 changes). Old rates (15%/10%/₹1 lakh/indexation) are out of date.
Equity LTCG computation
Long-term gains on equity-oriented funds above ₹1.25 lakh a year are taxed at 12.5%, with no indexation.
What it means
- The exemption is per person per year across all equity LTCG.
- Grandfathering applies to units bought before 1 Feb 2018.
- Gain ₹3,00,000
- Taxable = 3,00,000 − 1,25,000 = 1,75,000
- Tax = 12.5% × 1,75,000
Answer: ₹21,875 plus cess
Dividend and bonus stripping
Losses created by buying just before an IDCW or bonus record date and selling soon after are disallowed.
What it means
- Dividend stripping: buy within 3 months before, sell within 9 months after the record date; loss ignored up to the IDCW.
- Bonus stripping: loss on original units ignored and added to the cost of bonus units.
- Loss ₹15,000; IDCW received ₹10,000
- Disallowed up to ₹10,000
Answer: Allowable loss ₹5,000
Set-off of capital losses
Short-term losses offset any capital gains; long-term losses offset only long-term gains; both carry forward 8 years.
What it means
- Capital losses can't offset salary.
- Return must be filed on time to carry forward.
Memory tricks
Equity-oriented funds: STCG 20%; LTCG 12.5% on gains above ₹1.25 lakh a year (as of Nov 2026).
12 months for equity-oriented; 24 months for other (12 if listed); specified debt always slab.
Stripping rules apply to purchases within 3 months before and sales within 9 months after the record date.
STCL against STCG or LTCG; LTCL only against LTCG; carry forward 8 years.
TDS of 10% on IDCW above ₹10,000 a year per fund for residents (from April 2025).
Try 3 NISM-style questions
Q1. Income earned by a SEBI-registered mutual fund scheme is
- Taxed at 30% in the hands of the fund
- Exempt from income tax in the hands of the fund
- Taxed at the AMC's corporate tax rate
- Taxed at 12.5% in the fund
Show answer
Answer: (2) Exempt from income tax in the hands of the fund
Mutual funds are exempt; investors are taxed on what they receive or realise.
Q2. A distributor's best response when a client asks a complex tax question is to
- Guarantee the tax outcome in writing to win the client's trust
- Refuse to discuss tax at all
- Give advice based on the old rates, since rules change often
- Explain the general rules and suggest confirming with a tax professional
Show answer
Answer: (4) Explain the general rules and suggest confirming with a tax professional
Distributors should know the basics and refer complex cases.
Q3. Which statement about the Income-tax Act, 2025 is correct (as of Nov 2026)?
- It abolishes capital gains tax on mutual funds from 1 April 2026
- It applies only to companies, not individuals
- It replaces the 1961 Act from 1 April 2026, with renumbered sections
- It came into force in 2030
Show answer
Answer: (3) It replaces the 1961 Act from 1 April 2026, with renumbered sections
The new Act applies from 1 April 2026; section references change.
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