Taxation

This original lesson is awaiting subject-matter review. If something looks wrong, tell us through the contact page.

Tax is where PMS differs most from a mutual fund, so clients ask about it often. This chapter (about 5 marks) explains why PMS is taxed as if the client held each security directly, how capital gains on equity and debt are taxed under the current rules, how dividends and interest are taxed, how losses are set off, and how PMS fees are treated. Tax rules change with each Budget, so always check the current year's rates before advising clients.

1PMS is taxed in the client's own hands

In a PMS, the securities belong to the client, held in the client's own demat account. So the tax law looks through the portfolio manager: every transaction is treated as the client's own.

Each sale of a security in the portfolio can create a capital gain or loss for the client in that year.
Dividends and interest received in the portfolio are the client's income.
The portfolio manager provides a tax statement (capital gains by security, income received) to help the client file returns, but the client pays the tax.

This is different from a mutual fund, where the scheme's own buying and selling creates no tax for the investor. The investor is taxed only on dividends received and when units are redeemed.

Example In one year a PMS manager sells 12 stocks to rebalance. The client has to report 12 capital gain or loss transactions. A mutual fund investor who did not redeem any units would have no capital gains to report, however much the scheme traded.

Remember

PMS = look-through taxation: each trade is the client's.
Mutual fund = tax only on the investor's own redemption or dividends.

Practise this concept (4 questions)

2Capital gains on equity

For listed equity shares (and equity-oriented fund units) on which securities transaction tax (STT) has been paid:

Short-term: held for 12 months or less. Taxed at 20% (for transfers from 23 July 2024).
Long-term: held for more than 12 months. Taxed at 12.5% on gains above ₹1.25 lakh in a financial year (for transfers from 23 July 2024). No indexation.

The ₹1.25 lakh exemption is per person per year, across all of the person's long-term gains on listed equity, not per PMS account.

Example A client's PMS sells shares held for 18 months at a gain of ₹3.25 lakh, and she has no other equity long-term gains that year. Taxable gain = 3.25 − 1.25 = ₹2 lakh. Tax at 12.5% = ₹25,000 (plus surcharge and cess as applicable).

Example Shares held for 7 months are sold at a gain of ₹1 lakh. Short-term gain taxed at 20% = ₹20,000 (plus cess).

These rates were introduced for transfers from 23 July 2024 and continue for FY 2026-27, as Budget 2026 made no change to them.

Remember

Listed equity: 12 months is the dividing line.
STCG 20%; LTCG 12.5% above ₹1.25 lakh a year (from 23 July 2024).

Practise this concept (6 questions)

3Capital gains on debt and other assets

Listed bonds and debentures: long-term if held for more than 12 months, taxed at 12.5% without indexation; short-term gains are taxed at the investor's slab rate.
Unlisted bonds and debentures: gains are taxed at the slab rate, whatever the holding period.
Debt-oriented mutual fund units bought on or after 1 April 2023: gains are taxed at the slab rate, whatever the holding period.
Other assets (for example, unlisted shares): long-term if held for more than 24 months, taxed at 12.5%.

Remember

Unlisted bonds and post-April 2023 debt fund units: slab rate always.

Practise this concept (4 questions)

4Dividends, interest and TDS

Dividends received in the portfolio are added to the client's income and taxed at the slab rate.
Interest on bonds, debentures and deposits is also taxed at the slab rate.
Companies deduct TDS on dividends above a threshold. The client claims credit for TDS when filing the return.
For non-resident clients, tax on capital gains is usually deducted at source by the payer, at the rates that apply to non-residents.

Remember

Dividends and interest: slab rate, with TDS credit.

Practise this concept (2 questions)

5Losses, fees and costs

Setting off losses

A short-term capital loss can be set off against both short-term and long-term gains.
A long-term capital loss can be set off only against long-term gains.
Unused capital losses can be carried forward for 8 years, if the return is filed on time.

Costs

Brokerage and transaction costs on a purchase or sale can be included in the cost of acquisition or deducted from the sale price when computing the gain.
STT is not deductible from capital gains.
PMS management and performance fees: tax authorities generally do not allow them to be deducted from capital gains, and courts have taken differing views. Clients should take professional tax advice.

Capital gains or business income? Very frequent trading can be treated as business income. For listed shares held for more than 12 months, taxpayers may choose to treat the gains as capital gains, provided they follow that treatment consistently.

Remember

STCL sets off against STCG and LTCG; LTCL only against LTCG; carry forward 8 years.
STT is not deductible; PMS fees are generally not deductible from capital gains.

Practise this concept (6 questions)

Original summary written by Integrato Digital to complement the official NISM workbook (September 2025 version). Read the workbook for the full text.