I don’t think that is correct. Based on my testing, ff a user has muted a category, but is watching a tag, they will receive notifications for topics in the muted category that are tagged with their watched tag. The tagged topic will also appear in the user’s latest topics list.
Interestingly, if a user is watching a category, but has muted a tag, topics in the category tagged with the muted tag will not show up in the category’s latest topics list, but the user will receive a notification for topics with the tag.