NISM Series X-B · Chapter 12: Taxation of Other Products
L1 · FoundationFoundation — Employee Stock Option Plans and Sovereign Gold Bonds
What an ESOP is and the two separate points at which it is taxed, the crucial distinction between the exercise date and the allotment date, the deferment available to eligible start-up employees, and the full features and tax treatment of Sovereign Gold Bonds including the redemption exemption that applies only to individuals.
26 min read · Worth 2% of the paper · Written from pages 260–292 of the official NISM workbook · Updated 18 September 2026
12.1 Employee Stock Option Plans
Why companies use ESOPs, in the workbook's own reasoning:
And why start-ups in particular use them:
12.1.1 The terms of an ESOP
The four key dates — learn them in order, because the tax rules attach to different ones:
| Date | What happens |
|---|---|
| GRANT date | The company offers the ESOP. Nothing is charged and nothing is taxed |
| VESTING date | The date on which the employee BECOMES ENTITLED TO EXERCISE the right to acquire the shares |
| EXERCISE date | The date on which the employee EXERCISES this option to buy the shares |
| ALLOTMENT date | The date the shares are actually allotted to him |
Example 1 from the workbook: On April 1, Year 0, XYZ India Private Limited grants ESOP to Mr A to purchase 1,000 shares at a pre-determined price of Rs 100 per share. Date of vesting is April 1, Year 4. Thus, Mr A CAN EXERCISE THE RIGHT TO EXERCISE SHARES ON OR AFTER APRIL 1, YEAR 4. In case of ESOPs, EMPLOYEES ARE GIVEN AN OPTION to exercise, AND IT IS NOT COMPULSORY FOR THEM TO EXERCISE SUCH ESOP.
12.1.2 The two-stage taxation
This is the single most important structural fact about ESOPs, and every question tests it.
Stage 1 — at the time of allotment of shares (taxed as SALARY)
And now the sentence that decides most examination questions on this topic:
Read that twice. Two different dates are doing two different jobs:
| Question | Answer |
|---|---|
| WHEN is the perquisite taxed? | In the year of ALLOTMENT |
| WHAT VALUE is used? | The FMV on the date of EXERCISE |
The three-step computation:
| Step | What to do |
|---|---|
| Step 1 | Determine the FAIR MARKET VALUE of shares ON THE DATE ON WHICH THE EMPLOYEE EXERCISES THE OPTION. FMV has to be determined as per RULE 3 of the Income Tax Rules. The FMV of shares ON THE DATE OF VESTING SHALL NOT BE CONSIDERED |
| Step 2 | Determine the PRE-DETERMINED VALUE of shares paid or to be paid by the employee to the employer at the time of exercising the option |
| Step 3 | Value of perquisite = (Step 1 − Step 2) × NUMBER OF SHARES EXERCISED |
Note that Step 1 rules out TWO dates — the vesting date is expressly excluded, and the allotment date is excluded by the passage above. Only the EXERCISE date matters for value.
Example 2 — the perquisite computation
| Particulars | Amount |
|---|---|
| Date of granting of ESOP | 01-04-2021 |
| Vesting Period | 01-04-2021 to 31-03-2024 |
| Date of Exercise of ESOP | 10-05-2024 |
| Fair Market Value as on March 31, 2024 | 6,000 |
| Fair Market Value as on May 10, 2024 | 6,500 |
| Number of ESOP exercised | 100 |
| Pre-determined price paid by the employee | 500 |
| Value of perquisite [(Rs 6,500 − Rs 500) × 100] | Rs 6,00,000 |
Note carefully which FMV was used. The workbook deliberately supplies two figures — Rs 6,000 on the vesting date and Rs 6,500 on the exercise date — and uses Rs 6,500, the exercise date value. The Rs 6,000 is a distractor placed there to catch the careless.
Stage 2 — at the time of sale of shares (taxed as CAPITAL GAINS)
And here two more rules apply, each using a different date again:
Assemble the four rules into one table — this is the heart of the topic:
| Element | Which date governs |
|---|---|
| Year in which the perquisite is taxed | ALLOTMENT |
| Value of the perquisite | FMV on EXERCISE |
| Start of the holding period | ALLOTMENT |
| Cost of acquisition for capital gains | FMV on EXERCISE |
The symmetry is elegant and worth noticing. The FMV on exercise is taxed once as salary, and then becomes the cost for capital gains — so the same appreciation is never taxed twice. And allotment governs both the year of the salary charge and the start of the holding period.
Example 4 — the dates in action
One month separates the two dates, and each is used for a different purpose.
The four capital gains outcomes
| Case | Condition | Treatment |
|---|---|---|
| (a) Equity shares chargeable to STT — LONG TERM | Sold after holding more than 12 months with STT paid | Section 112A — gains exceeding Rs 1,25,000 at 12.50% plus surcharge and cess. If listed but STT NOT paid (an over-the-counter sale), the gain falls under Section 112(1) — still 12.50%, but the initial exemption of Rs 1,25,000 will NOT be available |
| (b) Equity shares chargeable to STT — SHORT TERM | STT paid | 20% plus surcharge and cess under Section 111A |
| (c) UNLISTED equity shares not chargeable to STT — LONG TERM | Held more than 24 months | 12.50% plus surcharge and cess under Section 112 |
| (d) Equity shares not chargeable to STT — SHORT TERM | Income-tax SLAB RATE applicable to the taxpayer |
Note case (a)'s second limb carefully — a listed share sold off-market without STT still gets 12.50 per cent, but loses the Rs 1,25,000 threshold. That is precisely the distinction between sections 112A and 112 drawn in Chapter 11.
12.1.3 Deferment of tax for start-up employees
The problem
The hardship is real and specific to start-ups. An employee of an unlisted start-up receives shares he cannot sell — there is no market — yet faces a cash tax bill on their notional value, deducted from his salary.
The solution
Four sections amended — 192, 140A, 191 and 156. Note that the charge itself is not removed; only the DEDUCTION and PAYMENT are deferred.
What is an eligible start-up
Plus three conditions, all of which must be satisfied:
| # | Condition |
|---|---|
| 1 | Incorporated ON OR AFTER 01-04-2016 BUT BEFORE 01-04-2024 (the Finance Act 2023 extended the outer date from 01-04-2023) |
| 2 | Total turnover shall NOT EXCEED RS 100 CRORES in the previous year for which the section 80-IAC deduction is claimed (raised from Rs 25 crore by the Finance Act 2020) |
| 3 | Must hold a CERTIFICATE OF ELIGIBLE BUSINESS from the INTER-MINISTERIAL BOARD OF CERTIFICATION |
Note the form requirement: only a COMPANY or an LLP. A partnership firm or a proprietorship cannot be an eligible start-up, however innovative.
12.2 Sovereign Gold Bonds
Why an SGB beats physical gold
Five advantages: no storage risk or cost, assured market value, periodical interest, no making charges or purity concerns, and no risk of losing the certificate.
Who may hold them
A useful practical point for an adviser with clients moving abroad — the holding need not be liquidated on emigration.
The features, in numbers
| Feature | Detail |
|---|---|
| Rate of interest | 2.50 PER CENT (FIXED RATE) PER ANNUM ON THE NOMINAL VALUE. Interest credited HALF-YEARLY to the bank account, with the last interest payable on maturity along with the principal |
| Denomination | ONE GRAM of gold and multiples thereof |
| Minimum investment | ONE GRAM |
| Maximum subscription per fiscal year (April–March) | 4 KG for individuals; 4 KG for HUF; 20 KG for trusts and similar entities |
| Joint holding | The limit applies to the FIRST APPLICANT ONLY |
| What the ceiling includes | Bonds subscribed under different tranches during initial issuance AND those PURCHASED FROM THE SECONDARY MARKET. It does NOT include holdings as collateral by banks and other financial institutions |
| Maturity | 8 YEARS from the date of issue |
| Redemption price | The SIMPLE AVERAGE OF THE CLOSING PRICE OF GOLD OF 999 PURITY OF THE PREVIOUS THREE WORKING DAYS from the date of repayment, published by the INDIA BULLION AND JEWELLERS ASSOCIATION LIMITED |
| Notice of maturity | RBI / depository informs the investor ONE MONTH IN ADVANCE |
| Premature redemption | Allowed AFTER THE FIFTH YEAR from the date of issue. Such repayments will be made ON THE NEXT INTEREST PAYMENT DATE |
| Tradability | Tradable on exchanges if held in DEMAT form; can also be TRANSFERRED to any other eligible investor |
| Collateral | Eligible as collateral for loans from banks, financial institutions and NBFCs. The LOAN TO VALUE RATIO WILL BE THE SAME AS APPLICABLE TO CONVENTIONAL GOLD LOAN prescribed by the RBI. Granting such a loan is subject to the decision of the bank and CANNOT BE INFERRED AS A MATTER OF RIGHT |
Memorise the numbers: 2.50 per cent, 8 years, 5 years for premature redemption, 4 kg / 4 kg / 20 kg, 999 purity, three working days, one month's notice.
12.2.1 Tax implications of SGBs
Interest income
Note the distinction the workbook is careful to draw: NO TDS does not mean NO TAX. The interest is fully taxable at slab rates; it simply arrives without deduction, so the investor must account for it himself. This is consistent with section 193 from Chapter 10 — no TDS on Central or State Government securities to a resident.
Capital gain on REDEMPTION — the crucial exemption
The exemption is narrow, and its boundaries are exactly what questions test:
| Element | Requirement |
|---|---|
| The act | Must be a REDEMPTION, not a sale or transfer |
| The person | Must be an INDIVIDUAL |
And a point that catches many out:
An individual who bought SGBs on the exchange rather than in the original tranche still gets the redemption exemption.
Capital gain on TRANSFER — no exemption at all
Two exits from the same instrument, and completely different results:
| Exit route | Individual | Non-individual |
|---|---|---|
| REDEMPTION (on maturity or premature, after year 5) | NOT a transfer. NO capital gains at all | Taxable — 12.50% if held over 12 months; slab rates if less |
| TRANSFER (sale on exchange or off-market) | TAXABLE — 12.50% long term, slab rates short term | Same |
Example 6 — the simplest illustration
Same Rs 1,00,000 of gain. Nil tax for the individual, Rs 12,500 for the trust.
Example 7 — accrued interest on a transfer
Mr X purchased 100 SGBs at nominal value Rs 4,25,000 on 28-04-2019, interest 2.5 per cent payable half-yearly on 28 October and 28 April, redeemable 28-04-2027.
Situation 1 — held to maturity. No capital gain arises (individual, redemption). But the interest received or receivable is chargeable — for FY 2020-21, Rs 10,625 (4,25,000 × 2.5%).
Situation 2 — transferred on 01-08-2024 for Rs 7,50,000.
Interest accrued = Rs 4,25,000 × 2.5% × 95/365 = Rs 2,765.
| Particulars | Amount |
|---|---|
| Period of holding (28-04-2019 to 01-08-2024) | More than 12 months |
| Nature | Long-term capital gain |
| Sale price (7,50,000 − 2,765) | Rs 7,47,235 |
| Less: Cost of acquisition | Rs 4,25,000 |
| Long term capital gain | Rs 3,22,235 |
| Tax | 12.50% |
This is the same technique as Chapter 10's Example 4 — accrued interest is taxed as INTEREST and subtracted from the sale consideration, so the same rupee is not taxed twice.
Situation 3 — transferred on 29-10-2024 for Rs 7,92,000.
Interest taxable for FY 2024-25 = Rs 4,25,000 × 2.5% × 211/365 = Rs 6,142.
| Particulars | Amount |
|---|---|
| Sale price [A] | 7,92,000 |
| Cost of Acquisition [B] | 4,25,000 |
| Long term capital gain | Rs 3,67,000 |
| Tax rate | 12.50% |
The difference between Situations 2 and 3 is a single day. Sell the day before a coupon date and accrued interest must be stripped out; sell the day after and there is nothing to strip, because the coupon has just been paid.
Think of it like this
The ESOP's four dates — the housing scheme booking
A company in Pune offers its senior staff flats in a scheme it is building. Four dates matter, and each does a different job.
The GRANT date — the day the letter arrives saying "a flat is reserved for you at Rs 40 lakh." Nothing is paid and nothing is owed. The workbook: the employer-company does not charge anything at the time of offering ESOPs.
The VESTING date — the day you become entitled to take the flat, after three years of service. The date on which the employee becomes entitled to exercise the right.
The EXERCISE date — the day you say "yes, I will take it" and pay your Rs 40 lakh. This is the date that fixes the VALUE of your benefit — if the flat is worth Rs 65 lakh that day, your benefit is Rs 25 lakh.
The ALLOTMENT date — the day the keys are handed over. This fixes WHEN you are taxed, and when your ownership clock starts running.
The Act splits the jobs deliberately: the FMV of shares AT THE TIME OF EXERCISING OF OPTION is considered for calculation of perquisite and NOT the FMV at the time of allotment, while the period of holding shall commence FROM THE DATE OF ALLOTMENT, AND NOT FROM THE DATE OF EXERCISING.
Value from exercise. Timing from allotment. Two dates, two jobs — and the exam will supply a vesting-date figure purely to see whether you use it.
Why the ESOP is never taxed twice — the price tag that moves to the receipt
A shopkeeper in Rajkot gives an employee a watch that retails for Rs 30,000, charging him only Rs 5,000. The employee has plainly received a benefit of Rs 25,000, and it is taxed as part of his pay.
Three years later he sells the watch for Rs 38,000. What is his profit?
If the law said "you paid Rs 5,000, so your profit is Rs 33,000," it would be taxing the Rs 25,000 all over again — once as salary and once as gain.
So it does not. The Rs 30,000 already taxed becomes his cost. His gain is Rs 8,000 — the genuine appreciation since he got it.
That is exactly the ESOP mechanism. The FMV on the exercise date is taxed once as a perquisite under section 17(2)(vi), and the workbook then provides that the fair market value of shares on the date of exercising the option shall be taken as the COST OF ACQUISITION of such shares to compute the capital gain.
One value, two stages, no double tax. Salary tax on the discount; capital gains tax on what happened afterwards.
And this is why an examiner can safely give you a single FMV figure for exercise and expect you to use it twice — once as the top of the perquisite calculation, and once as the bottom of the capital gains calculation.
Start-up ESOP deferment — the prize you cannot spend
Imagine winning a painting valued at Rs 20 lakh in a competition. You cannot sell it — there is no buyer for this artist yet — and you cannot eat it. But the tax office values it at Rs 20 lakh and wants Rs 6 lakh in cash, this year, deducted from your salary.
That was the position of every start-up employee before 2020. The workbook puts it exactly: as employees DO NOT GET ANY IMMEDIATE BENEFIT from the shares allotted under the ESOPs, the deduction of tax thereon in the year of allotment itself was VERY BURDENSOME FOR THEM AS IT REDUCES THE CASH FLOW IN THEIR HAND.
The shares of an unlisted start-up have no market. The employee holds paper, and pays cash.
The Finance Act 2020 did not abolish the charge — it deferred the collection, amending four sections: 192 (TDS on salary), 140A (self-assessment tax), 191 (direct payment by the employee) and 156 (notice of demand).
But the relief is narrow. It applies only to an eligible start-up under section 80-IAC — which must be a company or LLP, incorporated on or after 1 April 2016 but before 1 April 2024, with turnover not exceeding Rs 100 crore, and holding a certificate from the Inter-Ministerial Board of Certification.
Miss any one condition and the employee is back to paying cash tax on a painting he cannot sell.
Sovereign Gold Bonds — two doors out of the same room
A cinema hall has two exits. One is the main door, where a ticket collector waits. The other is the stage door at the back, which is unattended — but only members of a particular club may use it.
An SGB investor faces exactly that choice, and it is worth a great deal of money.
The stage door is REDEMPTION. Section 47 provides that redemption by an INDIVIDUAL does not amount to transfer and thus NO CAPITAL GAINS ARISE. Available on maturity at year eight, or on premature redemption after the fifth year. The workbook's Example 6 says it plainly: Mr X paid Rs 5 lakh, received Rs 6 lakh, and no tax at all.
The main door is TRANSFER — selling on the exchange or off-market. Here the collector is waiting. Even an individual shall be liable to pay tax on capital gains arising on TRANSFER of SGBs, as exemption has been provided ONLY IN CASE OF REDEMPTION AND NOT ON TRANSFER. 12.50 per cent long term, slab rates short term.
And the club membership is real: the stage door is for individuals only. The same Rs 1,00,000 gain that costs Mr X nothing costs a trust Rs 12,500.
One detail surprises people, and it is examinable: buying in the secondary market does not lose you the stage door. The workbook: if a person buys SGBs from the secondary market and not from the primary issue, the taxability on redemption would remain the same. How you got in does not matter. How you get out does.
No TDS is not no tax — the shopkeeper who trusts you to pay later
Most shops take the money at the counter. A few old establishments in Chennai keep a ledger: take what you need, settle at the end of the month. Nobody imagines the goods were free.
SGB interest works that way. The workbook: any payment of interest on SGBs would NOT ATTRACT ANY TDS as they are GOVERNMENT SECURITIES. Thus, investors would receive THE FULL AMOUNT of interest on SGBs in their bank accounts.
The full 2.5 per cent arrives, undeducted. And yet, one sentence earlier: the interest received on the sovereign gold bond shall be CHARGEABLE TO TAX under the head income from other sources and taxed as per the tax rates applicable in case of an assessee.
Fully taxable, entirely uncollected at source.
This matters practically in two ways. First, the investor must declare it himself — there is no Form 16A prompting him, and no entry in his Form 26AS to jog his memory. Second, he may need to pay advance tax, because nothing has been withheld on his behalf.
The same pattern appears in Chapter 10 under section 193: no TDS on Central or State Government securities to a resident, except the two named Savings (Taxable) Bonds.
An adviser who says "there is no TDS" and stops there has told his client only half the sentence — and the expensive half is the other one.
The accrued interest on an SGB sale — one day either side of the coupon
A tenant pays rent on the 1st of every month. If the landlord sells the building on the 28th, the buyer will collect the whole month's rent three days later — even though the seller owned it for 27 of those days. So the price is adjusted: the seller is credited for the rent he has effectively earned but not yet received.
SGBs pay interest half-yearly on 28 April and 28 October. The workbook's Example 7 tests the same day-counting on both sides of the coupon.
Sold 1 August — three months into the coupon period. The price of Rs 7,50,000 includes interest accrued from 29 April to 1 August — 95 days. The workbook computes Rs 4,25,000 × 2.5% × 95/365 = Rs 2,765, taxes it as interest, and subtracts it from the consideration, leaving a sale price of Rs 7,47,235.
Sold 29 October — one day after the coupon. The workbook: as SGBs were transferred the next day after the due date, NO INTEREST SHALL ACCRUE from the last coupon date to the date of transfer. Thus, interest amount SHALL NOT BE REDUCED from consideration. The whole Rs 7,92,000 is sale price.
A single day separates the two treatments, and the test is simply this: has a coupon just been paid, or is one building up inside the price?
The 4 kg ceiling and the first applicant — the family ration card
A ration card lists a family, but the entitlement is recorded against the head of the household. Adding names does not multiply the quota.
SGB limits work the same way, and the details are precise.
Per fiscal year (April–March): 4 KG for an individual, 4 KG for an HUF, and 20 KG for trusts and similar entities.
In case of joint holding, THE LIMIT APPLIES TO THE FIRST APPLICANT ONLY. So a couple cannot double their quota by putting each other's names second on alternate applications — the ceiling attaches to whoever applies first.
And the ceiling is wider than most people assume: the annual ceiling will include bonds subscribed under different tranches during initial issuance by Government AND THOSE PURCHASED FROM THE SECONDARY MARKET. You cannot take 4 kg in the primary issue and then buy more on the exchange.
One carve-out: the limit on investment will NOT include the holdings as COLLATERAL by banks and other Financial Institutions. Gold pledged to a lender does not count against the borrower's quota — sensibly, since it is security, not investment.
Note also that an HUF has its own separate 4 kg. A family with an individual holding and an HUF holding has 8 kg of capacity — which is planning, not evasion, because they are genuinely two different persons under section 2(31).
The 999 purity three-day average — the mandi price, not the shop price
A farmer selling grapes does not accept whatever the buyer says the price is today. He looks at the mandi rate, and a sensible contract takes an average of the last few days rather than one day's quotation, so that a single bad session cannot cheat either side.
The SGB redemption price is built exactly so. The workbook: on maturity, the Gold Bonds shall be redeemed in Indian Rupees, and THE REDEMPTION PRICE SHALL BE BASED ON THE SIMPLE AVERAGE OF THE CLOSING PRICE OF GOLD OF 999 PURITY OF PREVIOUS THREE WORKING DAYS from the date of repayment, PUBLISHED BY THE INDIA BULLION AND JEWELLERS ASSOCIATION LIMITED.
Four specifications, and each is examinable: simple average, closing price, 999 purity, previous three working days, IBJA published.
Compare this with what the jewellery buyer faces — making charges, disputes about purity, and whatever rate the shop chooses to quote. The workbook lists precisely these as the advantages of an SGB: SGB is free from issues like MAKING CHARGES AND PURITY in the case of gold in jewellery form.
And the courtesy built in: the RBI or depository shall inform the investor ONE MONTH IN ADVANCE about the date of maturity of the Bond. The farmer is told when the mandi day is coming.
Key terms in this chapter
- Allotment date
- The date the shares are allotted. It fixes the year in which the perquisite is taxed and the date from which the holding period runs.
- Alternative Investment Fund (AIF)
- A privately pooled investment vehicle established in India to collect funds from sophisticated investors for investment under a defined policy, excluding mutual funds and collective investment schemes, and requiring SEBI registration.
- Deemed credit rule (AIF)
- Income accruing to an AIF but not paid or credited to investors during the year is deemed to have been credited to their accounts on the last day of the previous year, in the proportion in which they would have been entitled to receive it.
- Double add-back
- The effect where an employer's NPS contribution is added once as salary and again within the excess over Rs 7,50,000 as a perquisite, while deduction under 80CCD(2) is allowed only once — so the contribution is effectively fully taxed.
- Eligible start-up (section 80-IAC)
- A company or LLP engaged in innovation, development or improvement of products, processes or services, or a scalable business model, incorporated on or after 1 April 2016 but before 1 April 2024, with turnover not exceeding Rs 100 crore, holding a certificate from the Inter-Ministerial Board of Certification.
- Employee Stock Option Plan (ESOP)
- A scheme giving employees the right, but not the obligation, to purchase a certain number of securities of the employer company at a discounted price, exercisable only after the vesting period.
- Endowment policy
- A life insurance policy for a particular term paying a lump sum of sum assured plus bonus on survival, and a death benefit to the nominee otherwise. Policies taken on or after 1 April 2023 with premium or aggregate premium exceeding Rs 5,00,000 are taxable as other sources even if the 10 per cent test is met.
- ESOP perquisite
- The difference between the fair market value of the shares on the exercise date and the pre-determined price paid by the employee, multiplied by the number of shares exercised, taxed as salary under section 17(2)(vi) in the year of allotment.
- Exercise date
- The date on which the employee exercises the option to buy the shares. The fair market value on this date fixes both the perquisite value and the cost of acquisition for capital gains.
- Gold ETF
- A mutual fund scheme investing primarily in gold or gold related instruments, taxed like physical gold — long term after more than 12 months at 12.50 per cent, but always short term if bought on or after 1 April 2023 and sold before 1 April 2025.
- High value ULIP
- A ULIP issued on or after 1 February 2021 where the aggregate premium of all affected policies exceeds Rs 2,50,000. Equity-oriented funds within it become long term after one year and are taxed at 12.50 per cent, with 20 per cent on short-term gains.
- Hybrid pass-through entity
- A structure in which some income is exempt at the entity level and taxable at the unit-holder level, while other income is taxed at the entity itself. REITs pass through rental income and SPV dividend and interest only.
- Index ETF
- A scheme investing in securities in the same proportion as an index. An equity index ETF is taxed like a listed equity oriented mutual fund, at 12.50 per cent on long-term gains above Rs 1.25 lakh under section 112A.
- Infrastructure Investment Trust (InvIT)
- A SEBI-registered trust investing in infrastructure projects such as roads, bridges, ports, airports, metros, power and telecommunications. Its taxation mirrors a REIT except that rental income is taxed in its own hands rather than passed through.
- National Pension System (NPS)
- A defined contribution retirement savings scheme administered and regulated by the PFRDA, in which savings are pooled and invested by regulated fund managers in government bonds, bills, corporate debentures and shares.
- NPS final withdrawal
- Payment on closure of the account or opting out, exempt up to 60 per cent of the total corpus. Since the scheme itself permits withdrawal of only 60 per cent, the lump sum is completely tax-free.
- NPS partial withdrawal
- A withdrawal before closure, exempt only for employees and only to the extent of 25 per cent of the employee's own contribution, permitted after three years from joining and a maximum of three times in the entire tenure.
- NPS Tier I
- The mandatory retirement account under the NPS, with restricted withdrawal, governed by the specific exemptions for partial and final withdrawal.
- NPS Tier II
- A voluntary savings account associated with the subscriber's PRAN, withdrawable at any time, whose profit or loss is taxed under capital gains like an open-ended mutual fund.
- NPS Vatsalya
- A scheme under which a parent or guardian contributes to a minor's NPS account, the contribution being deductible under section 80CCD(1B) within the Rs 50,000 limit, with partial withdrawals exempt up to 25 per cent of contributions under section 10(12BA).
- Permanent Retirement Account Number (PRAN)
- The unique number issued when an NPS account is opened, which remains with the subscriber throughout his lifetime.
- Premature redemption of SGB
- Early encashment permitted after the fifth year from the date of issue, made on the next interest payment date, against the bond's full tenor of eight years.
- Real Estate Investment Trust (REIT)
- A SEBI-registered trust set up by a sponsor to collect money from the public for investment in income-generating real estate, directly or through a special purpose vehicle in which it holds the controlling interest.
- Reverse mortgage
- A facility allowing senior citizens to mortgage their house property and borrow against it while continuing to occupy it. Section 47(xvi) excludes it from the meaning of transfer and section 10(43) exempts the loan received, both requiring a Central Government notified scheme.
- Rs 7,50,000 aggregate cap
- The ceiling on an employer's combined contribution to recognised provident fund, NPS and superannuation fund, introduced by the Finance Act 2020; the excess is taxed as a perquisite in the employee's hands.
- Rule 3
- The rule of the Income Tax Rules under which the fair market value of shares is determined for computing the ESOP perquisite.
- Salary for NPS purposes
- Basic salary plus dearness allowance where the terms of employment so provide. All other allowances and perquisites are excluded from the base for computing NPS deductions.
- Section 10(10D)
- The provision exempting sums received from a life insurance policy including bonus, subject to exceptions for keyman policies, section 80DD(3) receipts, and policies where premium exceeds 20 per cent (issued 2003 to 2012) or 10 per cent (issued from April 2012) of the capital sum assured.
- Section 10(23FBB)
- The provision exempting, in the unit-holder's hands, income received from an AIF that is in the nature of profits and gains of business or profession, that income having been taxed at the fund.
- Section 10(23FC)
- The provision exempting interest and dividend received by a REIT or InvIT from its SPV at the trust level, that income being taxed in the unit-holders' hands.
- Section 10(23FCA)
- The provision exempting rental income earned by a REIT at the REIT level, that income being taxed instead in the hands of the unit-holders.
- Section 10(23FD)
- The provision exempting in the unit-holder's hands income already taxed at the business trust, and also dividend from an SPV that has not opted for the concessional regime of section 115BAA.
- Section 115UB
- The provision granting pass-through status to Category I and Category II AIFs, exempting their income at the fund level and taxing it in the investors' hands — except business income, which is taxed at the fund.
- Section 194LBA
- The TDS provision for distributions by a REIT or InvIT — 10 per cent on rental income to a resident, 35 per cent to a foreign company and 30 per cent to other non-residents; 10 per cent on SPV dividend for both; and 10 per cent resident and 5 per cent non-resident on SPV interest.
- Section 194LBB
- The TDS provision under which an investment fund deducts tax on income taxable in the unit-holder's hands — 10 per cent for resident unit-holders and at rates in force for foreign unit-holders.
- Section 56(2)(xii)
- The anti-leakage provision inserted by the Finance Act 2023 taxing, in the unit-holder's hands under income from other sources, any sum distributed by a business trust that is not chargeable at the trust level, and also sums received on redemption of units.
- Section 80CCD(1)
- Deduction for the subscriber's own NPS contribution — the lower of the contribution or 10 per cent of salary for an employee, or 20 per cent of gross income for a self-employed person — within the overall Rs 1,50,000 cap, and available only under the old regime.
- Section 80CCD(1B)
- An additional deduction of Rs 50,000 for an individual's own NPS contribution, over and above the Rs 1,50,000 cap. Contributions to an NPS Vatsalya account share the same Rs 50,000 limit.
- Section 80CCD(2)
- Deduction for the employer's NPS contribution — 14 per cent of salary for Central or State Government employees, and 10 per cent under the old regime or 14 per cent under the new regime for other employees. It survives under both regimes.
- SGB redemption exemption
- Section 47 provides that redemption of an SGB by an individual does not amount to a transfer, so no capital gains arise. The exemption covers redemption only, and individuals only.
- SGB redemption price
- The simple average of the closing price of gold of 999 purity of the previous three working days from the date of repayment, published by the India Bullion and Jewellers Association Limited.
- Sovereign Gold Bond (SGB)
- A Government security denominated in grams of gold, issued by the RBI on behalf of the Government of India as a substitute for holding physical gold, paid for and redeemed in cash.
- Special Purpose Vehicle (SPV)
- A separate entity, which may be a company, floated to hold and develop real estate properties, in which the REIT holds a controlling interest.
- Start-up ESOP deferment
- The relief introduced by the Finance Act 2020, amending sections 192, 140A, 191 and 156, deferring the deduction and payment of tax on the ESOP perquisite for employees of eligible start-ups. The charge itself is not removed.
- Vesting date
- The date on which the employee becomes entitled to exercise the right to acquire the shares. The fair market value on this date is expressly not used for computing the perquisite.
Check you have understood it
The L1 test for this chapter has 8 questions. Score 60% to unlock L2 Application (worked numericals and scenarios) and then L3 Exam-Ready (NISM-style traps, timed, with this paper's real marking). Tests, the higher levels and full mock exams need a free account so we can track your progress.
Create a free accountOriginal explanatory writing based on the official NISM workbook for Series X-B, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.