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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Concept and Role of a Mutual Fund

In the context of a mutual fund, which of the following best describes the 'pass-through' status of the fund's income?

A mutual fund is a pass-through vehicle. Its income, after permitted expenses, belongs to unit holders, and the fund is exempt from tax on that income under the Income Tax Act, so investors are taxed rather than the fund paying corporate tax first.

  1. AThe fund pays corporate tax first and then distributes the balance to unit holders
  2. BIncome earned by the fund is passed on to investors after expenses, with the fund itself enjoying tax exemption on its income as per the Income Tax ActCorrect
  3. CThe fund retains all income and investors receive only capital gains
  4. DThe AMC keeps the income as its own revenue

Explanation

A mutual fund is a pass-through vehicle: income from investments, net of permitted expenses, belongs to the unit holders. The trust is exempt on the income of the scheme, so there is no tax at the fund level on that income. The option stating corporate tax is paid first describes a different structure and is wrong.

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