Key takeaways
- In a PMS, you pay tax on every capital gain as it happens, because you own the securities directly.
- Listed equity: 20% on short-term gains (held up to 12 months) and 12.5% on long-term gains above ₹1.25 lakh a year.
- Category I and II AIFs are pass-through, so income is taxed in your hands; Category III AIFs pay tax at the fund level.
- Mutual funds defer tax until you redeem, however much the fund trades.
- Compare investments on post-tax returns: PMS returns are usually reported pre-tax, Category III AIF returns post-tax.
Capital gains rates at a glance
| Asset | Short-term if held | Short-term rate | Long-term rate |
|---|---|---|---|
| Listed shares and equity mutual funds | Up to 12 months | 20% | 12.5% on gains above ₹1.25 lakh a year |
| Unlisted shares, including pre-IPO | Up to 24 months | Slab rate | 12.5% |
| Listed bonds and debentures | Up to 12 months | Slab rate | 12.5% |
| Debt mutual funds bought on or after 1 April 2023 | Any period | Slab rate | Slab rate |
| Dividends and interest | — | Slab rate | Slab rate |
Surcharge on these capital gains is capped at 15%, and a 4% health and education cess applies on top.
How PMS is taxed
A PMS is taxed as if you had made every trade yourself:
- Each sale by the manager creates a short- or long-term capital gain or loss for you, depending on how long that holding was owned.
- Dividends are credited to your account and taxed at your slab rate.
- Losses can be set off under the normal rules — short-term losses against short- or long-term gains, long-term losses only against long-term gains — and carried forward for eight years if you file on time.
- Your portfolio manager provides a capital gains statement to help you file your return.
Two points often surprise investors. First, turnover drives tax: a strategy that churns its holdings generates more short-term gains, taxed at 20%. Second, whether PMS fees can be deducted from capital gains has been contested, and many advisers take a conservative view — so treat fees as a cost that may not reduce your tax.
Moving shares from your own demat account into a PMS account in your name is not a sale. But if the manager then sells shares that don’t fit the strategy, those sales are taxable.
How Category I and II AIFs are taxed
Category I and II AIFs are pass-through vehicles. The fund doesn’t pay tax on most of its income; instead, each investor is taxed on their share as if they had earned it directly:
- Capital gains keep their character — gains on unlisted shares held for more than 24 months, for example, are long-term.
- Interest and dividends are taxed at your slab rate.
- Business income, where a fund has any, is taxed at the fund level instead.
- The fund deducts tax at source on income distributed to resident investors (10% under current rules) and tells you the nature of the income for your return.
Because tax arises as the fund realises income, a private equity fund’s tax usually falls in its later years, as investments are exited.
How Category III AIFs are taxed
Category III AIFs don’t have pass-through status. The fund pays tax on its income and gains, often at the maximum marginal rate — particularly on derivatives income treated as business income. Once the fund has paid, what it distributes to you is generally not taxed again.
- Reported NAVs and returns are usually net of tax at the fund level.
- Your own tax filing is simpler.
- For investors in lower tax brackets, fund-level taxation at the maximum rate can be less efficient than being taxed directly.
More on these funds in hedge funds in India.
How mutual funds compare
A mutual fund can buy and sell securities without any tax consequence for its investors. You pay capital gains tax only when you redeem units — for equity funds, 20% on short-term gains and 12.5% on long-term gains above ₹1.25 lakh. This tax deferral is one of the strongest arguments for mutual funds, especially for high-turnover strategies. See PMS vs mutual funds.
Comparing post-tax returns: a worked example
Take two PMS strategies that each earn 15% before tax in a year on ₹1 crore, with all gains realised as listed equity, before surcharge and cess:
| High-turnover PMS | Low-turnover PMS | |
|---|---|---|
| Gain before tax | ₹15 lakh | ₹15 lakh |
| How it is taxed | ₹10 lakh short-term at 20%; ₹5 lakh long-term at 12.5% above ₹1.25 lakh | ₹15 lakh long-term at 12.5% above ₹1.25 lakh |
| Tax | ₹2.00 lakh + ₹0.47 lakh = ₹2.47 lakh | ₹1.72 lakh |
| Gain after tax | ₹12.53 lakh (12.5%) | ₹13.28 lakh (13.3%) |
The same pre-tax return produces meaningfully different post-tax outcomes. In practice a PMS realises only part of its gains each year, and unrealised gains are taxed only when sold — which works in your favour. Ask any manager for their portfolio turnover, and compare a Category III fund’s post-tax NAV only against the post-tax result of the alternatives.
GIFT City funds
Funds in the GIFT International Financial Services Centre have a separate tax regime designed for non-resident investors, including exemptions on certain income and gains. The detail depends on the fund’s structure and on your country of residence, where you may still owe tax. See our NRI guide.
A note for NRIs
NRIs are generally taxed on Indian capital gains at the same rates, with tax deducted at source. A Double Taxation Avoidance Agreement (DTAA) with your country of residence may reduce Indian tax or allow a credit abroad, subject to a Tax Residency Certificate and other documents.
Frequently asked questions
Is PMS taxed like mutual funds?
No. In a PMS, each sale by the manager is taxed in your hands in that year. In a mutual fund, trades inside the fund are not taxed; you pay tax only when you redeem units.
What is the tax rate on PMS gains?
For listed shares, short-term gains (held up to 12 months) are taxed at 20% and long-term gains at 12.5% above ₹1.25 lakh a year, plus surcharge and cess. Dividends are taxed at your slab rate.
Are AIF returns taxable in the hands of investors?
For Category I and II AIFs, yes — income is passed through and taxed in your hands. For Category III AIFs, tax is paid at the fund level and distributions are generally not taxed again.
Can I deduct PMS fees from capital gains?
The deductibility of PMS fees against capital gains has been contested, and many advisers take the conservative view that they cannot be deducted. Take advice for your specific case.
Is transferring shares into a PMS taxable?
Moving shares from your own demat account into a PMS account held in your name is not a sale. However, if the manager later sells those shares, capital gains tax applies.
