Best Answer Explained in Below-:

In the sentence "My favourite activity is reading," the word "reading" functions as a gerund. A gerund is a form of a verb that ends in "-ing" and acts as a noun. In this context, "reading" refers to the activity itself, which is why it fits into a noun role. It answers the question of what “activity” the speaker enjoys.

Additionally, the structure of the sentence supports this identification. The phrase "My favourite activity" is the subject, and "is" serves as the linking verb, connecting the subject to its predicate. Here, "reading" complements the subject by specifying what the favorite activity is, thus reinforcing its role as a gerund.

While "reading" could also be seen as a verbal noun (option C) since it functions similarly to a noun, the term "gerund" emphasizes its origin as a verb and its current function in the sentence. Thus, the best answer is A) gerund, as it highlights both the grammatical structure and the meaning within the context.