India’s financial landscape is continuously evolving, and with it, the taxation policies surrounding various investment vehicles. Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs) have emerged as popular investment avenues for high net-worth individuals and institutional investors.

However, understanding the tax implications of these investment options can be a complex task. In this section, we’ll delve into the taxation aspects of PMS and AIFs in India, aiming to provide a clear and comprehensive understanding.


What are Portfolio Management Services (PMSs)?

Portfolio Management Services (PMSs) are specialized investment services offered to investors (specially HNIs, UHNIs, and NRIs) looking for personalized investment solutions. PMS involves the management of a portfolio of stocks, fixed income, debt, cash, structured products, and other individual securities, managed by a professional portfolio manager, at a small fee.

To know more about Portfolio Management Services (PMSs) in detail, click here.

Also Read

Top Portfolio Management Services (PMSs) in India

Read More

What are Alternative Investment Funds (AIFs)?

Alternative Investment Funds (AIFs) are funds established or incorporated in India for the purpose of pooling in capital from Indian and foreign investors. These funds can invest in a variety of assets and are broadly classified into three categories:

  1. Category I: Includes venture capital funds, SME funds, social venture funds, and infrastructure funds.
  2. Category II: Includes private equity funds, debt funds, and funds for distressed assets.
  3. Category III: Includes hedge funds and funds which trade with a view to make short-term returns. This category is again sub-divided into Long Only Cat III AIFs & Long-Short CAT III AIFs.

To know more about Alternative Investment Funds (AIFs) in detail, click here.

Taxation of Equity Portfolio Management Services (PMSs) & Alternative Investment Funds (AIFs)

Income from shares purchased through PMS is taxable as Capital Gains. Nature of these gains could be short term or long term depending on the churn in the portfolio. Typically, PMS follows a low churn but it depends upon the portfolio strategy. So, gains from stocks that are held for more than a year get treated as long term and are taxed @ 10% plus surcharges. For the holdings that traded within 1 year, treatment is short term, and are taxed @ 15% plus surcharges. For the income earned in form of dividends credited in the financial year, dividend distribution tax is already deducted at the source and in the hands of investor, these dividends tax-free. But, if total income from such dividends earned in a financial year is more than 10 lacs across all investments, then additional dividend income tax is also applicable.

For tax on Category I and II AIFs, these are generally treated as pass-through vehicles, meaning the income is taxed in the hands of the investors and not at the fund level. However, this pass-through status is not available for business income, which is taxed at the maximum marginal rate at the fund level.

Lastly, for Category III AIFs, these funds do not enjoy the pass-through status. Income from these funds is taxed at the fund level before distribution. The rate of taxation depends on the nature of the income – short-term capital gains, long-term capital gains, business income, and so on.

 

EQUITY
Listed Equity Unlisted Equity
MF PMS^ CAT III AIF CAT I AIF CAT II AIF
Tax on Short Term Gains on Equity* 15% 15% Taxed at the
fund’s level ^^
Taxed at the investor’s end, as per his/her tax slab
Tax on Long Term Gains on Equity* 10% 10%  20% with Indexation benefit

*Short term = Holding period <12 months in case of Listed Equity & <24 months in case of Unlisted Equity
Long Term = Holding period >12 months in case of Listed Equity & >24 months in case of Unlisted Equity
LT Gains are charged on MFs & PMSs @ 10% above Rs 1L p.a.
Non-equity Capital Gains: Added to income; ST = < 3 year holding, LT = > 3 year holding, no indexation benefit

^For the income earned in form of dividends credited in the financial year, dividend distribution tax is already deducted at the source and in the hands of investor, these dividends tax-free. But, if total income from such dividends earned in a financial year is more than 10 lacs across all investments, then additional dividend income tax is also applicable.

^^ Cat III AIFs are NOT pass-through vehicles, and thus they are taxed at the AIF level itself. The taxation rate depends on the type of income:
Business Income / Trading & Speculation / ST Capital Gains on Non-equity / Dividend Income: 42.7%
ST Capital Gains on Equity: 15% + 15% Surcharge = 17.9%
LT Capital Gains on Equity: 10% + 15% Surcharge = 11.9%
LT Capital Gains on Non-equity: 20% post indexation + 15% Surcharge = 23.9%

DEBT
MF PMS CAT II AIF
Tax on Short Term Gains on Debt Gains will be added to investor’s income and taxed as per income tax slab rate Gains will be added to investor’s income and taxed as per income tax slab rate It is a pass through structure in Cat II AIFs, hence the interest income is taxed as per the investor’s tax slab
Tax on Long Term Gains on Debt

PS: For Debt MFs, amount invested before 31.03.2023 will be subject to indexation benefits on LTCG.
In case of Debt, STCG = <36 months and LTCG = > 36 months
Differences between NRI and RI taxation may come in when the country where the NRI resides doesn’t have a Double taxation avoidance agreement(DTAA) with India. However, India has DTAA with most major countries like USA , UK, Singapore, Canada, and so on.
Pls refer to our section on country-wise taxation rules to know more.

Investing in Portfolio Management Services (PMSs) & Alternative Investment Funds (AIFs) can be a lucrative option for sophisticated investors, but it’s crucial to understand the tax implications associated with these investment vehicles.

The Indian tax regime surrounding PMS and AIFs is nuanced and requires careful consideration. This information is a very surface level one and investors are advised to consult with tax professionals to understand the specific implications for their investments and to stay updated with the latest tax regulations. Remember, effective tax planning can significantly impact the overall returns from these investment avenues.

Disclaimer: Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements

Do Not Simply Invest, Make Informed Decisions

WISH TO MAKE INFORMED INVESTMENTS FOR LONG TERM WEALTH CREATION