Taxation

Tax is where a PMS feels different from a mutual fund in the client's bank account. A fund investor pays tax only when she redeems; a PMS client pays tax on every sale her manager makes, because she owns the shares. Distributors who cannot explain this lose clients at the first March statement. The exam asks for the rates, the holding periods and a calculation.

Why PMS taxation is direct

In a PMS the securities are registered in the client's name in her own demat account. The portfolio manager is an agent acting under a power of attorney, not the owner. So every purchase, sale, dividend and interest receipt is the client's own transaction for income tax. There is no fund-level taxation and no deferral: a manager who churns the portfolio generates tax for the client in the same year, while a mutual fund manager's churn is invisible to the unit holder. The Income-tax Act, 2025, in force from 1 April 2026, carries the same capital gains framework as before with renumbered sections and a single tax year in place of the previous year and assessment year.

The portfolio manager supplies a transaction statement and a capital gains statement for the year (gains are computed first-in first-out within the demat account), and a copy of the audited statement of the account. The client reports the gains in her own return and pays advance tax in the quarter the gains arise.

Rates and holding periods

For securities a PMS typically holds:

• Listed equity shares and equity-oriented funds (STT paid): held 12 months or less, short-term gain taxed at 20%; held more than 12 months, long-term gain taxed at 12.5% on the amount above ₹1.25 lakh a year, with no indexation. The ₹1.25 lakh exemption is one figure for all the client's equity gains in the year, across PMS, direct holdings and mutual funds together.
• Listed bonds and debentures: long-term after 12 months at 12.5%; short-term at slab rates.
• Unlisted shares: long-term after 24 months at 12.5%; otherwise slab.
• Unlisted bonds and debentures, and debt mutual funds bought on or after 1 April 2023: taxed at slab rates whatever the holding period.
• Dividends and interest: taxed at slab rates; dividend TDS at 10% once dividends from a company exceed ₹10,000 in the year.

Surcharge on capital gains from listed equity is capped at 15%, and health and education cess of 4% applies on the total. Losses follow fixed rules: a short-term capital loss can be set off against short-term or long-term gains; a long-term capital loss only against long-term gains; unabsorbed losses carry forward for eight years if the return is filed by the due date.

Notice that the manager's decision to sell Stock C at a loss cut the short-term tax bill by ₹16,000. Managers who are tax-aware harvest losses in March for exactly this reason. Notice also that if the client had ₹1 lakh of long-term gains from mutual funds the same year, only ₹25,000 of exemption would be left for the PMS gains.

Fees, costs and transfers in and out

Three questions come up in practice. First, are PMS fees deductible? Brokerage and transaction charges form part of the cost of acquisition or are deducted from sale proceeds, so they reduce gains. Securities transaction tax is not deductible. Management and performance fees are the contested item: tribunal decisions have gone both ways, and the conservative position is that they are not deductible from capital gains. The client should take a position with her tax adviser and apply it consistently.

Second, transferring existing shares into a PMS is not a sale. Beneficial ownership does not change, so no capital gain arises; the original cost and purchase date are carried into the PMS account, and the holding period for any later sale runs from the original purchase. The same applies when the account is closed and shares are returned in specie to the client's demat.

Third, capital gains or business income? Frequent trading can look like a business, in which case profits are taxed at slab rates and expenses including fees become deductible. For listed shares, CBDT allows the taxpayer to treat holdings as investments and report capital gains, provided the stance is consistent year after year. Most PMS clients report capital gains.

Audit, compliance and the distributor's role

Two audits must not be confused. The portfolio manager's books for its PMS business are audited every year under the SEBI Regulations, and the client receives an audited statement of her own account; she may also appoint her own chartered accountant. That is a regulatory audit of the manager. A tax audit under the Income-tax Act applies to the client only if her activity is a business crossing the turnover threshold, which is unusual for an investor reporting capital gains.

Non-resident clients can invest in a PMS through NRE or NRO accounts under the portfolio investment scheme; their gains are taxed in India at the same rates with TDS deducted at source, and treaty benefits may apply. A distributor should not give tax advice, but should make sure the client knows that a PMS produces taxable events every year, that the manager's capital gains statement must reach her accountant before the advance tax dates, and that the fee illustration shows returns before her personal tax.

Keep the rate table and the set-off rules at your fingertips. The exam calculation is always the same shape: classify each sale by holding period, net the losses, apply the exemption, apply the rate.