Investment is not only about gaining returns but also involves the amount of capital you receive after paying taxes. When it comes to personalized financial management, Portfolio Management Services (PMS) are one of the most popular options chosen by wealthy investors in India, offering customized investment strategies, ownership of securities, and professional fund management that adheres to individual goals and risk appetite.
But the only misunderstood aspect of PMS is the taxation of your income and capital gains. In this article, we will elaborate on how PMS investments are taxed and what income they generate. And how reporting is handled, which will help you manage a PMS portfolio from experts like PMS AIF WORLD, who can help you in making smart investment decisions in case you’re planning to invest or manage a PMS portfolio.
How does PMS work?
When you invest in Portfolio Management Service, the securities do not enter into a shared pool; instead, they are purchased and allotted in your name. The primary role of a portfolio manager is to execute individual trades in accordance with investment goals, strategy, and risk profile. This unique process states that for every transaction, whether buying, selling, or holding, it has a direct tax impact on your portfolio. You are bound to report your profits, losses, dividends, and interests in your income tax return, as you handle your personal stock portfolio.
Types of taxation of PMS investment
There are mainly three types of tax on PMS, which include:
Capital gains
Capital gain taxation is an essential component of the PMS tax structure. The rate and classification depend on how much time you want to hold it and the type of asset, like equity, debt, or hybrid.
- Equity investment: If the PMS invests in listed shares:
- Short-term capital gains (STCG): If you sell an equity share within a year of purchase, the gain qualifies as short-term. It is taxed at 20% under Section 111A of the Income Tax Act, along with surcharge and cess.
- Long-term capital gains (LTCG): If you hold an equity for more than a year, the gain is classified as long-term. It is taxed at 12.5% under section 112A on profits exceeding ₹1 lakh in a financial year, without any indexation benefits being applied.
- Debt or non-equity investment: For debt bonds, equities, or other non-equity shares.
- Short-term capital gains (STCG): Profits from assets held for less than or equal to 2 years are added to the salary and taxed as applicable income tax.
- Long-term capital gains (LTCG): Profits from assets held for more than a year are taxed at 12.5% without indexation benefits, which help reduce the effective tax rate. In such a case, inflation is adjusted.
Dividends, interest income, and other earnings
PMS investors also earn interest on debt and dividends from equity shares, which are treated as taxable income. This income is added to your account to your total annual revenue and taxed as part of your income tax slab. Sometimes, tax deducted at source (TDS) is applied depending on the payment and investment structure.
How PMS taxation differs from mutual funds?
While PMS and Mutual funds may look similar, as they involve professional fund management, their tax structures are totally different—the reason: ownership in PMS, where you own the securities, versus mutual funds, where you own units.
The table below shows a quick comparison between Portfolio Management Service and a Mutual fund.
| Aspect | PMS | Mutual Funds |
| Ownership | The investor owns shares | The investor owns fund units. |
| Taxable events | On every sale of stock within PMS | Only when mutual fund units are redeemed |
| Capital gains basis | For transaction calculation | Calculated when units are redeemed |
| Tax deduction | Not applicable | Applicable for ELSS mutual funds (for deduction under section 80C) |
| Dividends | Taxed as per the investor’s income tax slab. | Only Dividends are Tax Free. |
| Turnover outcomes | Frequent trade leads to more taxable events | Lower turnover due to fund-level management. |
Tax reporting and documentation for PMS investors
While an asset management company handles back-office and reporting tasks in mutual funds, PMS investors may consider a more integrated approach during tax season. Portfolio Management Service providers simplify this by offering a more detailed report for every financial year, which includes:
- A summary of the portfolio statement, which includes all your holdings, valuations, and transactions.
- Realised profit or loss statement, which includes gain/loss, selling, and holding time of securities.
- List of dividend and interest reports of income credited to your account.
- Auditor certificate showing tax calculations and capital profit or loss details.
These documents help a chartered accountant to file an income tax return easily.
Conclusion
PMS taxation may seem complex, but once you understand the structure, it becomes easily manageable and logical. The real issue is optimising your PMS portfolio for both returns and tax efficiency. To simplify this, PMS AIF WORLD comes as a saviour to help investors choose PMS products that align with their goals, risk tolerance, and tax planning strategies.
Take a moment to research before investing to choose the right PMS that can be managed efficiently and structured smartly to help you earn more profit than you would otherwise. After all, it is all about successful PMS investment, where we will make money by keeping it.
