How PMS Returns Are Taxed in India: AY 2026-27 Guide

How are PMS returns taxed for AY 2026-27? In a Portfolio Management Service you own the shares directly, so every sale the manager makes is taxed in your hands that year. Listed equity: STCG 20% (held 12 months or less), LTCG 12.5% above Rs 1.25 lakh (held over 12 months). Dividends and interest are taxed at slab rate. PMS fees are not clearly deductible from capital gains. No TDS for residents, so pay advance tax, and file ITR 2 or ITR 3.

Portfolio Management Services are sold as a premium alternative to mutual funds, but the tax treatment is fundamentally different, and many investors discover that only when the capital gains statement arrives at ITR time. This guide covers FY 2025-26 (AY 2026-27), which is still governed by the Income Tax Act 1961. The Income Tax Act 2025 applies from 1 April 2026 (tax year 2026-27 onwards) and renumbers the sections, but the rates discussed here carry over.

PMS vs Mutual Fund: The Key Tax Difference

The difference comes down to ownership.

There is no separate "PMS tax rate". The rules for listed shares under Sections 111A and 112A apply to shares held through a PMS exactly as they apply to shares you bought yourself.

Taxation of Equity PMS

• Both rates apply to sales on or after 23 July 2024 and are unchanged for FY 2025-26.
• Surcharge on 111A and 112A gains is capped at 15%, which matters for high-income PMS investors. 4% cess applies on top.
• The Rs 1.25 lakh exemption is per person per year, shared across your PMS, direct holdings and equity mutual funds.
• Under the new regime, the Section 87A rebate cannot be used against tax on 111A or 112A gains.

The Portfolio Churn Problem

Active strategies sell and rebuy often. Any position sold within 12 months produces short-term gain at 20% rather than long-term gain at 12.5%. When comparing a PMS's pre-tax return with a mutual fund's, adjust for this: the mutual fund's internal churn is not taxed in your hands until you redeem.

Capital Gains or Business Income?

CBDT Circular 6/2016 lets a taxpayer choose to treat listed shares held over 12 months as investments, and the Assessing Officer is not to dispute that choice if applied consistently. Most PMS investors report capital gains. If you instead treat the portfolio as a trading business, the income moves to business income at slab rates, PMS fees become a business expense, and you file ITR 3. Pick one treatment and stay with it.

Taxation of Debt PMS

The Finance Act 2023 brought market-linked debentures and specified debt mutual funds under Section 50AA. The Finance (No. 2) Act 2024 extended it to unlisted bonds and debentures transferred on or after 23 July 2024. See the capital gains rates ready reckoner for other asset classes.

Dividends and Interest in a PMS Account

• Dividends on shares in your PMS account are taxed at your slab rate, under both regimes. Surcharge on dividend income is capped at 15%.
• TDS on dividends is deducted by the paying company, not the PMS provider: 10% under Section 194 when dividends from one company exceed Rs 10,000 in the year (limit raised from Rs 5,000 from 1 April 2025).
• Interest on bonds and debentures is taxed at slab rate. Listed dematerialised debentures lost their TDS exemption from 1 April 2023, so Section 193 TDS can apply.
• NRI investors: TDS on dividends, interest and capital gains is under Section 195, subject to any DTAA benefit with a valid Tax Residency Certificate.

Our dividend income guide covers the Section 57 interest deduction and reporting.

Are PMS Fees Deductible from Capital Gains?

This is the most disputed question in PMS taxation.

Section 48 allows, against sale value, only:

• expenditure incurred wholly and exclusively in connection with the transfer, and
• the cost of acquisition and cost of improvement.

STT is expressly not deductible. Brokerage on each purchase and sale is deductible, as part of cost or as a transfer expense. The problem is the fixed management fee and performance fee, which are charged on assets under management or on profit, whether or not a particular share is sold.

• Against deduction: the Mumbai ITAT in Devendra Motilal Kothari v. DCIT held that PMS fees are not linked to any particular purchase or sale and are not allowable under Section 48.
• For deduction: some other ITAT benches have allowed PMS fees, treating them as part of the cost of acquisition or as transfer expenses.

The position is unsettled. If you claim the fees:

• allocate them to specific transactions where you can, and keep the fee invoices and PMS statements;
• expect the claim to be questioned and be ready to take it to appeal;
• never claim the same fee twice, once as a business expense and again against capital gains.

Advance Tax on PMS Gains

Resident PMS investors have no TDS on capital gains, so the tax is yours to pay through advance tax if your total liability for the year, after TDS, is Rs 10,000 or more.

• Section 234C (1% per month on instalment shortfalls) does not apply to a shortfall caused by capital gains, provided the tax on that gain is paid in the remaining instalments, or by 31 March if none remain. Ask your PMS provider for a quarterly realised-gains report so you can pay in the right instalment. Details in our Section 234B and 234C guide.
• Section 234B (1% per month) applies if less than 90% of the year's tax is paid by 31 March.

For FY 2025-26, all four instalments have passed. Any tax still unpaid goes in as self-assessment tax before you file.

How to Report PMS Gains in Your ITR

ITR 1 and ITR 4 allow only up to Rs 1.25 lakh of Section 112A long-term gain, with no short-term gains and no losses to carry forward, which an active PMS portfolio almost never meets. Use the ITR form selector if in doubt.

Documents to collect from your PMS provider:

• Realised capital gains statement for the year, scrip-wise with ISIN, purchase and sale dates, cost and sale value
• Transaction statement or contract notes
• Dividend and interest statement, with TDS details
• Fee invoices (management, performance, custody)

Long-term gains on listed equity go into Schedule 112A and short-term gains under Section 111A in Schedule CG. Reconcile the PMS statement with your AIS before filing: sales, dividends and interest from the PMS demat account appear there under your PAN, and mismatches can trigger a notice.

Tax-Loss Harvesting in a PMS

Because the shares are yours, the manager can sell loss-making positions before 31 March to book losses that offset gains booked earlier in the year.

• India has no statutory wash-sale rule, but keep trades genuine and at market prices, and avoid dividend and bonus record dates (Sections 94(7) and 94(8)).
• Unabsorbed capital losses carry forward for 8 assessment years, only if the ITR is filed by the due date.
• Ask your PMS whether it does year-end harvesting; not all do. Our tax-loss harvesting guide has worked examples.

Common Mistakes PMS Investors Make

Where Tax Garden Helps

Tax Garden's team works from your PMS provider's statements to:

• classify each sale as STCG or LTCG and apply the Rs 1.25 lakh exemption across all your equity holdings;
• fill Schedule CG and Schedule 112A in ITR 2 or ITR 3;
• reconcile AIS entries for the PMS demat account;
• compute advance tax as gains are booked during the year;
• respond to notices on capital gains mismatches.

Sources: Income Tax Act 1961, Sections 48, 50AA, 111A, 112, 112A, 193, 194, 195, 234B, 234C; Finance (No. 2) Act 2024; Finance Act 2025; CBDT Circular 6/2016; SEBI (Portfolio Managers) Regulations 2020. Verify on incometax.gov.in before acting. This article is general information, not professional advice.

Frequently Asked Questions

How are PMS returns taxed in India?

Exactly like direct equity, because the shares sit in your own demat account. Listed equity sold within 12 months is taxed at 20% under Section 111A. Listed equity held over 12 months is taxed at 12.5% under Section 112A on gains above Rs 1.25 lakh a year. Every sale the portfolio manager makes is a taxable event in your hands, in the year it happens.

Can I deduct PMS management fees from capital gains?

It is disputed. Section 48 allows only expenses incurred wholly and exclusively in connection with the transfer, plus cost of acquisition and improvement. The Mumbai ITAT in Devendra Motilal Kothari v. DCIT disallowed PMS fees, while some other benches have allowed them. Brokerage on each trade is clearly deductible. Claiming fixed or performance fees is a position you may have to defend in appeal.

Do PMS providers deduct TDS on capital gains?

Not for resident investors. You pay the tax yourself through advance tax and self-assessment tax. For NRI investors, tax is deducted at source on capital gains under Section 195. Dividends received in the PMS account carry TDS by the paying company under Section 194 when they exceed Rs 10,000 per company in a year.

Will I pay Section 234C interest if my PMS books a large gain late in the year?

Not if you catch up in time. Section 234C does not charge interest on a shortfall caused by capital gains, provided the tax on that gain is paid in the remaining advance tax instalments, or by 31 March if no instalment is left. Section 234B interest still applies if less than 90% of the year's tax is paid by 31 March.

Which ITR form should a PMS investor file?

ITR 2 if you have no business or professional income, ITR 3 if you do or if you treat the PMS portfolio as a trading business. ITR 1 allows only up to Rs 1.25 lakh of Section 112A long-term gain with no short-term gains or losses, which almost never fits an actively managed PMS.

How is a debt PMS taxed?

Listed bonds and debentures held over 12 months give long-term gains taxed at 12.5% without indexation under Section 112. Held 12 months or less, the gain is taxed at slab rate. Unlisted bonds and debentures transferred on or after 23 July 2024, and market-linked debentures, are always treated as short-term under Section 50AA and taxed at slab rate, whatever the holding period.

Can my PMS manager do tax-loss harvesting for me?

Yes. A short-term capital loss can be set off against both short-term and long-term gains, and a long-term loss only against long-term gains. India has no statutory wash-sale rule, but trades should be genuine market transactions. Unabsorbed losses carry forward for 8 assessment years only if your ITR is filed by the due date.

What is the minimum investment for PMS?

SEBI's Portfolio Managers Regulations 2020 set a minimum investment of Rs 50 lakh per client, in cash or in securities. The minimum has no bearing on how the gains are taxed.