PMS Tax — Why Each Transaction Is Taxed in the Client's Hands
A PMS client owns the securities in the account, so every sale the manager makes is taxed in the client's hands. This lesson explains why, sets out the rates for listed shares as of October 2026, and covers what is not deductible and what remains unsettled.
Why every sale counts
In a PMS the client owns the securities directly. When the portfolio manager sells a share, it is the client's share that is sold, so the sale is the client's own transaction. The gain or loss on it arises in the client's hands at that point, not only when the account is closed.
One consequence is that tax can arise in a year in which the client has withdrawn nothing, because the manager sold some holdings and bought others within the account. Buying a security does not by itself create a gain: it is the sale that is taxed.
A mutual fund works differently. The investor holds units, and a capital gain arises when the units are redeemed.
The rates for listed shares
For listed shares on which securities transaction tax (STT) has been paid, the holding period decides the treatment. Shares held for 12 months or less give a short-term gain; shares held for more than 12 months give a long-term gain.
Rates as of October 2026: short-term gains are taxed at 20% under section 196 of the Income-tax Act, 2025 (section 111A of the old 1961 Act). Long-term gains are taxed at 12.5% on the amount above ₹1.25 lakh a year under section 198 (section 112A of the old Act). The ₹1.25 lakh is a single yearly limit across all such gains. Surcharge and cess are extra. The long-term rate was 10% before 23 July 2024.
These rules cover listed shares with STT paid. Other securities that a PMS account may hold are taxed differently.
What is not deductible, and what is unsettled
STT paid on buying or selling shares is not deductible in computing capital gains. It cannot be added to the cost or taken off the sale price, and it is not a credit against the tax due.
Whether a portfolio manager's fees can be deducted against capital gains is a contested question, and tribunal decisions differ. No flat answer can be given here.
Losses
Sales in a PMS account can produce losses as well as gains. A short-term capital loss may be set off against short-term or long-term capital gains. A long-term capital loss may be set off only against long-term capital gains. Losses that cannot be absorbed may be carried forward for eight tax years, subject to the conditions the Act sets.
Rules at a glance
One tax year in a PMS account
- Assumptions of this example: in one tax year the manager's sales of listed shares (STT paid) in a client's account produce a short-term gain of ₹2,00,000, a long-term gain of ₹6,00,000 and a long-term loss of ₹75,000. The client has no other capital gains or losses. Rates as of October 2026; surcharge and cess are ignored, and so are the manager's fees.
- Short-term gain: ₹2,00,000 × 20% = ₹40,000.
- Net long-term gain: ₹6,00,000 − ₹75,000 = ₹5,25,000 (the long-term loss is set off against the long-term gain).
- Long-term gain above the yearly limit: ₹5,25,000 − ₹1,25,000 = ₹4,00,000.
- Tax on long-term gain: ₹4,00,000 × 12.5% = ₹50,000.
- Total: ₹40,000 + ₹50,000 = ₹90,000.
Result. On these assumptions the tax on the year's sales is ₹90,000 before surcharge and cess. It is payable by the client even if every rupee of the sale proceeds stayed invested in the account. STT paid on the transactions is not deducted in arriving at the gains.
Key points
- The client owns the securities, so each sale in the account is taxed in the client's hands, not only when the account is closed.
- Listed shares (STT paid), rates as of October 2026: short-term (held 12 months or less) 20%; long-term 12.5% on gains above ₹1.25 lakh a year.
- Surcharge and cess are extra.
- STT is not deductible in computing capital gains.
- Whether PMS fees can be deducted against capital gains is contested; tribunal decisions differ.
Common misunderstandings
- Tax does not wait until the PMS account is closed: each sale by the manager is the client's own transaction and is taxed in that tax year.
- STT is not a cost that reduces the gain: it cannot be added to the purchase cost, taken off the sale price or claimed as a credit.
- It is not safe to assume PMS fees reduce taxable gains: the question is contested and tribunal decisions differ.
Questions people ask
Why is a PMS client taxed while the money is still in the account?
Because the client owns the securities. A sale by the manager is the client's own sale, and the gain or loss arises then, whether or not the proceeds are withdrawn.
Can PMS fees be deducted from the gains?
That is a contested question on which tribunal decisions differ, so no flat answer can be given.
Are the rates here the whole tax bill?
No. They are the base rates as of October 2026 for listed shares on which STT has been paid; surcharge and cess are extra.
What this lesson relies on
- Income-tax Act, 2025 — sections 196 and 198 (sections 111A and 112A of the Income-tax Act, 1961)
- Income-tax Act, 2025 — provisions on set-off and carry-forward of capital losses
- SEBI (Portfolio Managers) Regulations, 2020 (structure of a PMS account)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.