How PMS is taxed
Every PMS trade is the client's own trade, so the client is taxed as if they held the shares directly.
A PMS is not a fund and pays no tax of its own. The shares sit in the client's own demat account, every purchase and sale is the client's transaction, and every dividend is the client's income. So the client is taxed exactly as if they had bought and sold those securities themselves. People call this pass-through taxation; the reason is simply that the PM is never the owner.
That has two consequences a distributor should explain upfront. A discretionary PMS that trades actively generates a stream of taxable events the client did not choose individually, and a mutual fund's internal trading, by contrast, is not taxed in the investor's hands until redemption.
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Which Act applies
The Income-tax Act, 2025 replaced the 1961 Act from April 1, 2026 and uses a single "tax year" in place of previous year and assessment year. Gains made up to March 31, 2026 (FY 2025-26 and earlier) are still assessed under the 1961 Act, where the equity sections are 111A and 112A. The rates below have been the same since July 23, 2024 and carried into the 2025 Act; only the section numbers changed.
Capital gains on what a PMS typically holds
Listed equity shares sold with STT paid
Short-term if held
12 months or less
Short-term rate
20% (s.196; 111A of 1961 Act)
Long-term rate
12.5% on gains above ₹1.25 lakh a year (s.198; 112A)
Equity-oriented mutual fund units
Short-term if held
12 months or less
Short-term rate
20%
Long-term rate
12.5% above ₹1.25 lakh
Other listed securities (for example listed bonds)
Short-term if held
12 months or less
Short-term rate
Slab rate
Long-term rate
12.5% (s.197; 112)
Unlisted shares
Short-term if held
24 months or less
Short-term rate
Slab rate
Long-term rate
12.5%, no indexation
Debt mutual fund units bought on or after April 1, 2023, market linked debentures, unlisted bonds and debentures
Short-term if held
Always short-term, whatever the holding period (s.76; 50AA of 1961 Act)
Short-term rate
Slab rate
Long-term rate
Not applicable
| Holding | Short-term if held | Short-term rate | Long-term rate |
|---|---|---|---|
| Listed equity shares sold with STT paid | 12 months or less | 20% (s.196; 111A of 1961 Act) | 12.5% on gains above ₹1.25 lakh a year (s.198; 112A) |
| Equity-oriented mutual fund units | 12 months or less | 20% | 12.5% above ₹1.25 lakh |
| Other listed securities (for example listed bonds) | 12 months or less | Slab rate | 12.5% (s.197; 112) |
| Unlisted shares | 24 months or less | Slab rate | 12.5%, no indexation |
| Debt mutual fund units bought on or after April 1, 2023, market linked debentures, unlisted bonds and debentures | Always short-term, whatever the holding period (s.76; 50AA of 1961 Act) | Slab rate | Not applicable |
Worked example: a year in a ₹75 lakh discretionary account
Resident individual with salary income well above the basic exemption. Rates exclude surcharge and cess.
- 1
Short-term gains
Shares held under 12 months sold for a gain of ₹2,00,000. Tax at 20%: ₹40,000.
- 2
Long-term gains
Shares held over 12 months sold for a gain of ₹3,00,000. The first ₹1,25,000 is exempt; 12.5% on ₹1,75,000 is ₹21,875.
- 3
Dividends
₹60,000 received, added to income and taxed at the slab rate. A company deducts 10% TDS where an individual's dividends from it exceed ₹10,000 in the year; the client claims that TDS as credit. From April 1, 2026 no expense, including interest, can be deducted against dividend income.
- 4
Fees
The ₹1,50,000 management fee paid to the PM is not deducted from either gain.
Free account, this exam preselected.
Three rules that cause most questions
- Fees are not a capital gains deduction
- Capital gains are sale price minus cost of acquisition and expenditure wholly and exclusively in connection with that transfer (s.72). An annual management or performance fee is not tied to a particular sale, so it is generally not deducted. Securities transaction tax is expressly not deductible.
- F&O is business income
- Exchange-traded derivatives are excluded from the definition of speculative transactions, so profits or losses are non-speculative business income, not capital gains. A business loss can be set off against other income (not salary) and carried forward for up to 8 tax years.
- Basic exemption relief is for residents only
- A resident individual or HUF whose other income is below the basic exemption limit can use the shortfall against these capital gains. Non-residents cannot.
The tax statement from the PM
- check_circlePMs send clients an annual tax statement listing each realised gain as short-term or long-term, with dates and costs, plus dividends, interest and TDS. It is the working paper for the return.
- check_circleTDS deducted on the client's income is recorded in the client's portfolio account (Reg 30(1)(c)), and the periodic report shows dividends, interest and expenses (Reg 31).
- check_circleThe statement's format and timing are set by industry practice, not by a SEBI rule; the client agreement says what the PM provides.
- check_circleBecause each trade is the client's, the client (or their adviser) files the return. The PM does not pay tax on the client's behalf.
How XXI-A tests this
Arithmetic questions apply the 20% and 12.5% rates and the ₹1.25 lakh exemption, and classification questions ask under which head F&O income falls. The traps: deducting management fees from gains; using the rates in force before July 23, 2024, which older material and many question banks still carry; and treating the PMS as a taxable entity like an AIF. This is general information on how the law works, not tax advice for any individual.
FAQs
How is PMS taxed in India?expand_more
In the client's hands, trade by trade, as if the client held the securities directly. Listed equity gains are taxed at 20% short-term and 12.5% long-term above ₹1.25 lakh a year.
Are PMS fees tax deductible?expand_more
Not against capital gains. Only cost and expenses incurred wholly and exclusively for a particular sale are deductible, and STT is expressly excluded.
Is PMS more tax efficient than a mutual fund?expand_more
Not usually for an active strategy. A mutual fund's internal trades are not taxed in the investor's hands, while every PMS sale is a taxable event for the client.
How is F&O income in a PMS taxed?expand_more
As non-speculative business income at slab rates, not as capital gains. Losses can be carried forward for up to 8 tax years.