Understanding PMS and AIF Taxation in India | FY 2025–26

Introduction

For savvy investors exploring Portfolio Management Services (PMS) or Alternative Investment Funds (AIFs), tax treatment is a critical — and often overlooked — factor that impacts net returns. Both structures provide professional fund management but tax income, gains, and fees differently.

This page provides a detailed, easy-to-understand comparison of PMS vs AIF taxation — updated for FY 2024–25.

PMS Taxation – Direct, Transparent, and Investor-Led

Structure:

In PMS, you hold assets in your name (Demat account) without pooling funds.

Tax Treatment:

Component	Taxed By	Tax Rate / Rule
Short-Term Capital Gains (Equity ≤ 1 yr)	Investor	20% + surcharge & cess
Long-Term Capital Gains (Equity > 1 yr)	Investor	12.5% above ₹1 lakh
Unlisted Bonds / Debt	Investor	STCG – slab rate; LTCG – 12.5
Dividend Income	Investor	Taxed as per slab (TDS @10% if >₹5,000)
Interest Income	Investor	Taxed under “Other Sources”

 

Deductions:

• You can claim PMS fees (excluding STT/GST) as deductions against capital gains.
• The service provider must bill these fees separately and usually allows them in non-discretionary PMS.

Tax Filing & Advance Tax:

• Investors must file taxes under ITR-2 or ITR-3
• Advance tax applies if annual liability exceeds ₹10,000

AIF Taxation Overview – Varies by Category

Category I AIF – Tax Pass-Through (e.g., VC, SME, infra funds)

• The fund does not pay tax
• You pay tax directly on the income you receive.
• The tax department applies capital gains tax based on the holding period (e.g., LTCG after 2 years for equity at 12.5%, STCG gets added to your income tax slab).

AIF Category II – Tax Pass-Through (e.g., real estate, private credit, equity long-only)

• Same structure as Category I
• Income is taxed based on the nature of the underlying assets

Key Notes:

• Investors get audited statements for tax filing
• The fund does not pay tax at the entity level
• No expense deductions allowed for investors

AIF Category III – Taxed at Fund Level (e.g., hedge funds, long-short)

• Fund pays tax before distributing income
• Tax rate remains the same.
• Maximum Marginal Rate (~42.74%) applied to all gains and income generated by derivatives
• Investors receive post-tax returns
• No TDS or tax filing requirement for investors

Capital Gains Holding Periods (For AIF & PMS)

Asset Class	Short-Term Holding Period	Long-Term Holding Period
Listed Equity	≤ 12 months	> 12 months
Unlisted Equity / Debt	≤ 36 months	> 36 months

Key Tax Concepts for AIF & PMS Investors

Pass-Through Taxation (Cat I & II AIFs, PMS)

Income flows directly to investors. You must:

• Declare capital gains and interest income
• Pay tax based on the type and holding period

Taxed-at-Fund Level (Cat III AIFs)

• The investor doesn’t pay tax or file separately
• Fund pays taxes and distributes post-tax proceeds

If you’re focused on maximizing post-tax returns and comfortable with filing, PMS and Cat II AIFs can offer an edge. If you prefer ease, Category III AIFs provide administrative convenience — at a cost.

PMS vs AIF Taxation Summary

Aspect	PMS	AIF Category I & II	AIF Category III
Structure	Direct (Demat in investor’s name)	Pooled, pass-through	Pooled, taxed at the fund level
Tax on Capital Gains	Investor pays directly (12.5–20%)	Investor pays directly (12.5 – Income tax slab)	Fund pays taxes at the same rate
Tax on Interest Income	Taxed at the investor’s slab	Taxed at the slab	Taxed  fund level
Dividend Tax	Taxed at slab rate, no TDS	Taxed at the hands of the investor	Taxed at the fund level
Claiming Expenses	Allowed (for capital gains)	Not allowed	Not allowed
Tax Filing Responsibility	Investor	Investor	Fund

 

How PMS AIF WORLD Helps

At PMS AIF WORLD, we go beyond fund discovery. We help you:

• Compare post-tax performance of PMS vs AIFs
• Understand TDS, reporting, and tax obligations
• Choose structures that suit your income profile and risk appetite
• Coordinate with your CA for seamless tax planning