NISM Series XXI-A · Chapter 11: Taxation
L1 · FoundationTaxation of PMS — the ground floor
Who is a resident, how PMS gains on debt, equity and derivatives are taxed, why PMS fees are not deductible for capital gains, what tax reports a portfolio manager must give, and how NRIs invest through PMS.
13 min read · Worth 5% of the paper · Written from pages 164–174 of the official NISM workbook · Updated 18 September 2026
Why tax matters in PMS
PMS income is taxed in the hands of the investor — gains, dividends and interest from the portfolio are added to the investor's own taxable income. Income from PMS is taxed under several heads — capital gains, interest and dividends — and the rules depend on the investor category.
Understanding them is how investors optimise post-tax returns.
Three categories of investor
Resident Individuals (RIs)
Under the Income Tax Act, an individual is resident for a financial year if:
- they stay in India 182 days or more in the year, OR.
- they stay at least 60 days in the year and 365 days or more in the preceding four financial years.
Residents are further split:
| Type | Taxed on |
|---|---|
| Ordinary Resident (ROR) | Global income |
| Not Ordinarily Resident (RNOR) | Income earned or received in India, plus income from a business controlled from India |
Basic rules for residents: taxed under capital gains on equity and debt; no deduction for PMS fees and expenses while computing capital gains; gains split into long-term and short-term.
Non-Resident Indians (NRIs)
A person of Indian origin or Indian citizen who does not meet the resident conditions. NRIs are taxed only on income earned or received in India; foreign income is exempt. Rules are similar to residents but subject to TDS, with special rates under DTAA (Double Taxation Avoidance Agreements).
Non-Individuals
Corporates, firms, trusts and AOPs. Tax depends on the entity structure. They may claim PMS expenses as business expenses if treated as a trading entity.
Debt investments
| Item | Rule in the workbook |
|---|---|
| LTCG | Holding more than 24 months; taxed at 12.5% under Section 112 |
| Indexation | Removed since July 2024 |
| STCG | Holding 24 months or less; taxed at the investor's slab rate |
| Interest | "Income from other sources", at slab rate; some instruments deduct TDS |
Interest gets no indexation or capital gains benefit. Portfolio managers must give detailed tax reports on gains, interest and liabilities.
Equity investments
| Item | Holding period | Rate | Benefit / note |
|---|---|---|---|
| LTCG | More than 12 months | 12.5% (no indexation), Section 112A | First ₹1.25 lakh per financial year tax-free |
| STCG | 12 months or less | 20%, Section 111A | No exemption limit |
| Dividends | N/A | Slab rate, Section 56 | TDS 10% above ₹5,000 (up to FY 2024-25); threshold ₹10,000 from FY 2025-26 |
Two practical points. Investors must aggregate PMS LTCG with their direct stock and mutual fund gains — the ₹1.25 lakh exemption is per investor, per year, not per portfolio. And investors in lower slabs can claim a refund of dividend TDS when filing returns.
Derivatives (F&O)
Futures and options income in PMS is business income, not capital gains — taxed under "Profits and Gains from Business or Profession" (PGBP). This applies to both residents and NRIs. For residents it is added to total income and taxed at slab rates.
Losses:
- Can be set off against other business income or non-salaried income in the same year.
- Cannot be set off against salary.
- Unabsorbed loss can be carried forward up to 8 assessment years, and only against business income.
Tax audit for F&O turnover — three cases in the workbook:
| Turnover | Tax audit? |
|---|---|
| Up to ₹2 crore | Mandatory under Section 44AB(e) if profit is below 6% of turnover, the person opted out of presumptive taxation in the past five years, and total income exceeds the basic exemption limit. Not required if profit is 6% or more |
| ₹2 crore to ₹10 crore | Not required if over 95% of transactions are digital, regardless of profit or loss |
| Above ₹10 crore | Mandatory under Section 44AB(a), regardless of profit or loss |
For more clarity the workbook advises consulting a certified tax consultant.
NRIs and F&O. NRIs cannot trade derivatives directly but can do so through PMS. They must follow RBI rules and use their NRO account — non-repatriable, with funds held in India. They cannot use their NRE account for F&O. Gains are business income at NRI slab rates, and TDS may apply.
Are PMS fees tax-deductible?
For individuals reporting under capital gains: no.
- Management fees, performance fees, brokerage and GST are not deductible in computing capital gains.
- Capital gain = sale price − acquisition cost, with no deduction for PMS fees.
- If an investor treats investments as a business, PMS expenses may be deductible under business income — but most individuals report under capital gains.
- PMS fees attract 18% GST, which adds to cost and is not deductible from taxable income.
Tax reporting and compliance
Under the SEBI (Portfolio Managers) Regulations, 2020, portfolio managers must give periodic taxation reports. As per Regulation 30, they must disclose details of transactions, fees and income, and investors receive audited account statements and periodic reports on realised and unrealised gains, tax liabilities and expenses.
A taxation report typically covers:
- Capital gains summary — LTCG and STCG on equity (12.5% and 20%) and debt (slab rates for individuals).
- Derivatives income — business income, with carry-forward of losses for 8 years.
- Dividend income — at slab rates, after TDS for NRIs.
- Interest income — reported separately, at slab rates for individuals and corporates.
- Expense and fee details — management and performance fees, brokerage, STT and GST are not tax-deductible for individuals.
| Report | Timeline |
|---|---|
| Quarterly report | Within 30 days after each quarter — realised and unrealised gains |
| Annual tax report | At the end of the financial year, for ITR filing |
| Form 16A / TDS certificates | For TDS on dividends and interest |
These reports help accurate ITR filing, compliance, transparency and tax planning.
Portfolio Investment Scheme (PIS) for NRIs
PIS is an RBI facility letting NRIs and OCIs invest in Indian stock markets through a designated bank account. Under PIS, NRIs can invest in listed equity shares and convertible debentures on a repatriation (NRE) or non-repatriation (NRO) basis.
The key point: PIS approval is necessary for direct stock trading, but not required for PMS. That makes PMS attractive for NRIs.
NRI PMS routes:
- NRE PMS account — repatriable; funds can go back abroad.
- NRO PMS account — non-repatriable; gains and capital stay in India, subject to Indian tax.
Compliance: open an NRE or NRO account with a designated bank; invest through providers under the SEBI (Portfolio Managers) Regulations, 2020; no intraday trading or short-selling.
NRI tax figures as printed in 11.5.3: STCG 15% within 12 months; LTCG 10% on gains over ₹1 lakh after 12 months; dividends at slab rates with 20% TDS; NRO interest at 30% plus cess and surcharge; TDS 15% on STCG and 10% on LTCG (if gains exceed ₹1.25 lakh). These differ from the equity figures in 11.2.2 — see the Exam-Ready level.
Think of it like this
PMS tax is like a shared kitchen with separate meters
In a PG accommodation, one cook runs the kitchen for everyone, but each room has its own electricity meter. You pay for what your room used, not an average of the building.
PMS works the same way. One portfolio manager runs the strategy, but the gains and dividends are taxed in your hands. They show up on your tax meter. That is why your PMS gains must be added to your own direct stock and mutual fund gains when checking the ₹1.25 lakh LTCG exemption — the exemption belongs to you, not to each portfolio.
The ₹1.25 lakh exemption is a free baggage allowance
An airline lets you carry some kilograms free. Anything above is charged per kg. If you fly with two bags from two different shops, the airline still weighs them together.
Equity LTCG up to ₹1.25 lakh a year is the free allowance; above that, 12.5% is charged on the excess. And STCG is like a no-allowance ticket — 20% from the first rupee, with no exemption.
F&O income is a shop, not a savings jar
A kirana store owner in Nagpur earns profits from buying and selling stock every day. Those are business profits. If the shop makes a loss one year, he can set it against other business income — but not against his wife's salary from a bank job.
The workbook treats F&O income in PMS exactly like that shop: business income under PGBP. Losses offset other business or non-salaried income, never salary, and unused losses can be carried forward up to 8 assessment years against business income only.
NRE and NRO are two kinds of suitcase
An NRI working in Dubai has two suitcases. One he can take back on the flight — anything packed in it goes home with him. The other stays locked in his parents' house in Kerala.
The NRE PMS account is the first suitcase — repatriable. The NRO PMS account is the second — non-repatriable; gains and capital stay in India. And the workbook says F&O through PMS must use the NRO suitcase only; the NRE one cannot be used.
Key terms in this chapter
- Carry forward of losses
- Using an unabsorbed loss in later years. F&O losses: up to 8 assessment years, against business income only.
- DTAA
- Double Taxation Avoidance Agreement — a treaty under which special tax rates and exemptions may apply to NRIs.
- Form 16A
- The TDS certificate issued for tax deducted on dividends and interest.
- GST on PMS fees
- Goods and Services Tax at 18% on PMS fees; adds to cost and is not deductible from taxable income.
- Income from other sources
- The head under which interest and dividends are taxed at the investor's slab rate.
- Indexation
- Adjusting purchase price for inflation to reduce taxable gains. The workbook says it has been removed since July 2024.
- Long-term capital gain (LTCG)
- Gain on an asset held beyond the long-term period — more than 12 months for equity and more than 24 months for debt, per the workbook.
- Non-Resident Indian (NRI)
- An Indian citizen or person of Indian origin who does not meet the resident conditions; taxed only on income earned or received in India.
- Not Ordinarily Resident (RNOR)
- A resident taxed only on income earned or received in India, plus income from a business controlled from India.
- NRE PMS account
- A repatriable PMS account — funds can be sent back to the foreign country.
- NRO PMS account
- A non-repatriable PMS account — gains and capital remain in India. Required for NRI F&O through PMS.
- OCI
- Overseas Citizen of India — eligible along with NRIs to invest through PIS.
- Ordinary Resident (ROR)
- A resident taxed on global income.
- PGBP
- Profits and Gains from Business or Profession — the head under which F&O income in PMS is taxed.
- Portfolio Investment Scheme (PIS)
- An RBI facility letting NRIs and OCIs invest in Indian listed shares and convertible debentures through a designated bank account. Not required for PMS.
- Presumptive taxation
- A scheme where profit is taxed at a deemed rate; opting out in the past five years affects whether a tax audit is needed for low F&O profits.
- Resident Individual
- An individual in India for 182 days or more in the financial year, or 60 days in the year plus 365 days in the preceding four years.
- Section 111A
- The section under which equity STCG is taxed at 20%.
- Section 112A
- The section under which equity LTCG above ₹1.25 lakh is taxed at 12.5%.
- Set-off of losses
- Reducing one income by a loss in the same year. F&O losses can offset business or non-salaried income, not salary.
- Short-term capital gain (STCG)
- Gain on an asset held for the short-term period or less; 20% for equity, slab rate for debt, per the workbook.
- Taxation report
- A report from the portfolio manager covering capital gains, derivatives income, dividends, interest and fees, sent quarterly (within 30 days) and annually.
- Tax audit (Section 44AB)
- A mandatory audit of accounts in certain turnover and profit situations, e.g. F&O turnover above ₹10 crore.
- TDS
- Tax Deducted at Source — tax cut before income is paid; investors in lower slabs can claim a refund.
Check you have understood it
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Create a free accountOriginal explanatory writing based on the official NISM workbook for Series XXI-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.