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NISM XB Short Notes – Part 10: Taxation of Other Products – ESOP, SGB, NPS, REIT, InVIT, AIF, ETF (Chapter 12)

12 Apr 2026 • NISM-Series-10B: Investment Advisor (Level 2) Mock Tests

NISM XB Short Notes – Part 10: Taxation of Other Products – ESOP, SGB, NPS, REIT, InVIT, AIF, ETF (Chapter 12)

NISM Series X-B Investment Adviser Level 2 | Short Notes | PassNISM.in

Part 10 of the NISM XB short notes series covers Chapter 12 — the taxation rules for a range of other financial products that investment advisers commonly work with.

1. Taxation of Employee Stock Option Plans (ESOPs)

ESOPs are offered by companies to retain talented employees and align their interests with the company's growth.

How ESOPs Work

  1. Grant: The company grants the employee an option (right) to buy a specified number of company shares at a pre-determined exercise price (usually below market price).
  2. Vesting: The option can be exercised only after a vesting period (a time period the employee must wait before exercising).
  3. Exercise: The employee pays the exercise price and receives the shares.
  4. Sale: The employee can hold or sell the shares.

ESOP Taxation — Two Taxable Events

  • At the time of exercise: The difference between the market price of the share on the exercise date and the exercise price paid is treated as a perquisite (salary income). The employer is liable to deduct TDS on this amount.
  • At the time of sale: The difference between the sale price and the market price on the exercise date is treated as capital gains (short-term or long-term based on holding period from exercise date).

Featured Snippet Answer: ESOPs are taxed twice — first as a salary perquisite when exercised (difference between market price and exercise price), and second as capital gains when the acquired shares are eventually sold. 2. Sovereign Gold Bonds (SGBs)

SGBs are government securities denominated in grams of gold and issued by the Reserve Bank of India (RBI) on behalf of the Government of India.

  • Purpose: An alternative to holding physical gold — safer, cheaper, and more efficient.
  • Denomination: Units represent physical gold (1 gram = 1 unit).
  • Interest: SGBs pay a fixed annual interest of 2.5% on the nominal value, in addition to the gold price appreciation.
  • Redemption: At maturity (8 years), investors receive the market price of gold in cash.

SGB Tax Benefits

  • Interest earned on SGBs is taxable as income from other sources at the applicable slab rate.
  • Capital gains on redemption at maturity (after 8 years) are fully exempt — this is a significant tax advantage over physical gold and Gold ETFs.
  • If transferred before maturity (on exchange), capital gains apply based on holding period.
  • No TDS on interest paid on SGBs (though interest is taxable).

3. National Pension System (NPS) — Tax Treatment

NPS is taxed under the EET (Exempt-Exempt-Taxable) model — though recent amendments have moved it closer to EEE for most taxpayers:

  • Contributions: Deductible under Section 80CCD (up to Rs 1.5 lakh under 80C + Rs 50,000 additional under 80CCD(1B)).
  • Growth: Exempt from tax.
  • Lump sum withdrawal at age 60: Up to 60% of the corpus — exempt from tax.
  • Annuity portion: At least 40% must be used to buy an annuity — annuity income is taxable as salary/income from other sources.

4. Real Estate Investment Trusts (REITs)

REITs are trust-like structures that allow investors to own a share of income-generating real estate without buying property directly. They are similar to mutual funds but for real estate.

REIT Structure (Key Parties)

  • Sponsor: Sets up the REIT (usually a real estate developer); makes an application to SEBI.
  • REIT: Registered trust under SEBI (REIT) Regulations 2014; holds real estate assets (directly or through SPVs).
  • Special Purpose Vehicle (SPV): A company or LLP in which REIT holds 50% or more of equity/interest.
  • Unit-holders: Investors who buy REIT units and receive income distributions.

Property Types

REITs invest across property types including offices, apartments, retail centres, warehouses, data centres, hospitals, and hotels. Most REITs focus on one property type.

5. Infrastructure Investment Trusts (InVITs)

InVITs are similar in structure to REITs but invest in infrastructure assets instead of real estate:

  • Roads, bridges, ports, airports, metro rail, power generation and transmission, telecom towers, SEZs, etc.
  • Registered with SEBI under SEBI (InVIT) Regulations 2014.
  • Structure mirrors REITs with a Sponsor, InVIT Trust, SPVs, and Unit-holders.

6. Alternative Investment Funds (AIFs)

An AIF is a privately pooled investment vehicle established in India that collects funds from sophisticated (high net worth) investors — Indian or foreign — and invests according to a defined investment policy.

AIFs do not include mutual funds, collective investment schemes, or other SEBI-regulated funds. They are classified into three categories:

  • Category I AIFs: Invest in start-ups, early-stage ventures, social ventures, SMEs, infrastructure (VCFs, social impact funds, SME funds, infrastructure funds).
  • Category II AIFs: Invest in private equity or debt — neither Category I nor Category III.
  • Category III AIFs: Employ complex trading strategies (hedge funds); may use leverage.

Set-off rule for AIFs: Losses arising in the hands of an investment fund under PGBP shall be carried forward by the fund itself and cannot be passed on to unit-holders.

7. Exchange Traded Funds (ETFs)

ETFs are hybrid instruments — they have the diversification of a mutual fund but trade on a stock exchange like shares, with real-time price changes throughout the day.

Types of ETFs

  • Gold ETFs: Track the price of physical gold. Each unit represents approximately 1 gram of gold held by the fund.
  • Index ETFs: Track a market index like Nifty 50 or Sensex. Passive investment vehicle with low expense ratios.

ETF vs Index Fund vs Gold ETF vs Gold Mutual Fund — Comparison

This is a topic mentioned in the NISM XB workbook under product comparisons (Chapter 19). Key differences:

  • ETFs trade intraday on the exchange; index funds are bought/sold at end-of-day NAV.
  • ETFs require a demat account; index funds do not.
  • ETFs generally have lower expense ratios than actively managed funds.
  • Gold ETF vs SGB: SGBs offer additional interest income and LTCG exemption on maturity.

Quick Revision Checklist — Other Products Taxation (NISM XB)

  • ☑ ESOP: perquisite at exercise + capital gains at sale
  • ☑ SGB: 2.5% interest (taxable) + gold price appreciation; LTCG exempt at maturity
  • ☑ NPS: 60% lump sum exempt; 40% annuity taxable as income
  • ☑ REIT: Sponsor → REIT → SPV → Unit-holder; SEBI regulated (2014)
  • ☑ InVIT: same structure as REIT but for infrastructure assets
  • ☑ AIF: 3 categories; Cat III = hedge fund type
  • ☑ AIF losses: stay in the fund; not passed to unit-holders
  • ☑ ETF: exchange-traded; real-time price; demat needed; passive strategy

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