PGBP

Most gains a PMS client makes on shares and bonds are taxed as capital gains. Gains and losses on futures and options (F&O), though, are taxed differently, as business income, under the head "Profits and Gains from Business or Profession", usually shortened to PGBP.

The workbook's reasoning: because a PMS provider actively manages trades in derivatives, the resulting gains or losses are treated as the output of a business activity, not passive investment gains, even though the client never set up a formal trading business. This applies to both resident individuals and NRIs alike.

Classification (Chapter 11, section 11.2.3). Income from F&O transactions in a PMS is classified as business income, taxed under PGBP, not as capital gains, whatever the client's residency status.

Tax rate. For resident individuals, PGBP income from derivatives is added to total taxable income and taxed at the individual's own income tax slab rates. There is no separate flat rate the way there is for short-term or long-term capital gains.

What follows from the classification. Because F&O income is business income and not a capital gain, losses can be set off against other business or non-salaried income in the same year, see Set-off of losses, and unabsorbed losses carried forward for up to 8 assessment years against future business income only, see Carry forward of losses. A tax audit may also become mandatory depending on turnover and profit ratio, under the same section's three-tier rule.

The workbook does not restate general PGBP computation rules, such as allowable business expenses or depreciation, beyond the F&O-specific treatment; its PGBP content in this paper is confined to derivatives income in a PMS.

Mr. Nair, a salaried IT professional, also runs a PMS mandate that actively trades index futures and options. In one financial year, his salary is ₹22,00,000 and his F&O trading through the PMS produces a net profit of ₹4,50,000.

That ₹4,50,000 is not a capital gain. It is business income under PGBP. It gets added to his total taxable income, ₹22,00,000 salary plus ₹4,50,000 PGBP equals ₹26,50,000, and taxed at his applicable slab rates on the combined figure, exactly as if he ran a small trading business alongside his job.

Had the same ₹4,50,000 instead come from selling equity shares he held in his PMS for over a year, it would have been taxed as long-term capital gains at 12.5% above the ₹1.25 lakh exemption, a completely different tax treatment for what might look, to the client, like just another PMS gain.

Chapter 11 (Taxation), section 11.2.3 (Taxation on Derivatives), introduces PGBP as the classification for F&O income in a PMS, and the same section's audit-turnover table and loss set-off and carry-forward rules all follow from this classification. Expect a question testing whether F&O income is capital gains or business income, business income under PGBP, and a slab-rate computation question.

• F&O income in a PMS is PGBP, business income, not capital gains. This is the foundation fact the rest of Chapter 11's derivatives-taxation content builds on.
• PGBP income is taxed at slab rates for individuals, unlike the flat rates that apply to short-term and long-term capital gains.
• This applies to both resident individuals and NRIs. Residency status does not change the PGBP classification itself, only which of an NRI's other income is taxable in India at all.
• PGBP losses follow business-loss set-off and carry-forward rules, which are stricter about what they can be set off against than a straightforward capital loss.