NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Taxation (NISM XXI-A)

Taxation of NRIs and Other Investors in PMS

Updated 11 October 2026 · Fact-checked

Tax on a PMS investor depends on who the investor is. Residents pay tax by category. NRIs and FPIs pay tax only on Indian income, usually with TDS under Section 195. DTAA can reduce the rate if the investor holds a Tax Residency Certificate. Identify the investor, the income type, then the rate.

Understand Taxation of NRIs and Other Investor Categories

PMS is not a taxed entity. The investor owns the securities in a portfolio managed for them, so gains, dividends and interest are taxed in the investor's hands. The rate depends on the investor category: individual, NRI, FPI, HUF, company or trust.

Start with residential status. A resident is taxed on global income. A non-resident (including an NRI) is taxed only on income that is received in India or arises in India. Gains from selling Indian shares held in a PMS portfolio arise in India, so they are taxable in India whatever the investor's residence.

For non-residents, tax is usually collected at source. The portfolio manager acts as the payer and deducts TDS under Section 195 on capital gains and other Indian income paid to a non-resident. The rate is the rate in force, plus surcharge and 4% health and education cess. The investor can apply for a lower deduction certificate under Section 197 if the TDS would be too high.

A DTAA (Double Tax Avoidance Agreement) is a treaty between India and another country. It stops the same income being fully taxed twice. The investor gets whichever is more beneficial, the Income-tax Act or the treaty. To claim treaty benefit, the investor normally gives a Tax Residency Certificate (TRC) from the home country and Form 10F, with other declarations the payer asks for.

Other categories follow simple logic. A HUF is taxed like an individual, at slab rates, with its own PAN. A company has no basic exemption limit and pays corporate tax rates. A trust is taxed based on its type: a charitable trust can be exempt if it meets the conditions, while a private discretionary trust is generally taxed at the maximum marginal rate. FPIs are taxed under a special regime with their own rates.

Key formulas to remember

Taxable base for non-residents: Taxable in India = income received in India + income arising in India; Foreign income of an NRI is not taxed in India. Indian PMS gains and dividends are.
Basic residency test: Resident if stay in India ≥ 182 days in the year (other conditions also exist); There are additional tests based on 60 days plus 365 days in the preceding four years, with relaxations for some citizens. Know that residence decides global or Indian-only taxation.
Capital gains rates on listed equity (STT paid): STCG = 20% | LTCG = 12.5% on gains above ₹1,25,000 in a year; Holding period for listed shares: up to 12 months is short term, more than 12 months is long term. Cess of 4% is added. The ₹1,25,000 exemption applies to the year's LTCG under this provision.
TDS on payments to non-residents: TDS = rate in force × amount + surcharge (if any) + 4% cess; Section 195 applies to capital gains and other sums chargeable in India. A lower deduction certificate under Section 197 can reduce it.
DTAA relief rule: Tax payable = lower of Act rate or treaty rate (needs TRC and Form 10F); Treaty applies only if it is more beneficial. Without the TRC, the treaty benefit is not available at source.
Category quick map: Resident individual/HUF → slab rates | Company → corporate rate | NRI → Indian income only, TDS | FPI → special regime; Trusts depend on type: charitable (exempt if conditions met) or discretionary (maximum marginal rate).

How to solve Taxation of NRIs and Other Investor Categories questions

Use the same sequence for any question on taxation of NRIs and other investors in PMS.

1Identify the investor category: resident individual, NRI, FPI, HUF, company or trust.
2Check residential status. This decides whether foreign income is taxable and whether TDS under Section 195 applies.
3Classify the income: short-term or long-term capital gain, dividend, interest, or business income.
4Pick the rate for that category and income type. Check whether the investor category has a special regime, such as FPI.
5Apply any exemption or threshold that the question allows, such as the ₹1,25,000 limit on long-term gains in listed equity.
6Add 4% cess (and surcharge if the question gives it) and work out TDS if the investor is a non-resident.
7If a treaty is mentioned, check for a TRC and Form 10F, and apply the lower of the Act rate or the treaty rate.
8Check the answer against the options and eliminate those that use the wrong rate or forget the cess.

Quickest way: Three-question filter

When to use it: Use this for conceptual MCQs on who is taxed on what, and who deducts TDS.

Ask who the investor is. NRI or FPI means Indian income only and TDS at source. HUF means like an individual. Company means corporate rate.
Ask what the income is. Capital gain, dividend or interest each has its own rate.
Ask if a treaty is mentioned. If yes, look for TRC. No TRC means no treaty benefit at source.
For numbers: gain × rate, then × 1.04 for cess. Do the ₹1,25,000 reduction first, only for long-term gains in listed equity.

Common mistakes in Taxation of NRIs and Other Investor Categories

Taxing an NRI's foreign income in India.
Students remember that residents pay on global income and apply it to everyone.
Fix: For a non-resident, only income received in India or arising in India is taxable.
Forgetting that the portfolio manager deducts TDS for NRI clients.
Students think TDS applies only to salary or interest on residents.
Fix: Link non-resident payments with Section 195. The payer deducts the tax at the rate in force.
Leaving out the 4% cess in TDS or tax computations.
Base rate is memorised and the add-on is ignored.
Fix: Multiply the tax by 1.04 unless the question says to ignore cess. The trap option is often the number without cess.
Claiming DTAA benefit without a Tax Residency Certificate.
Students treat the treaty as automatic.
Fix: Treaty benefit needs a TRC and Form 10F, and applies only when it is more beneficial than the Act.
Applying the ₹1,25,000 exemption to short-term gains.
Students mix up the two types of gains.
Fix: The limit applies to long-term gains on listed equity. Short-term gains on such equity are taxed at 20% from the first rupee.
Treating a company or a trust like an individual with a basic exemption.
Individual slab rules are better remembered than entity rules.
Fix: A company has no basic exemption limit. A trust's tax depends on its type, charitable or discretionary.

Worked examples

Example 1

A resident HUF earns long-term capital gain of ₹4,25,000 from listed equity shares in its PMS portfolio. STT has been paid. Tax on this gain is 12.5% above ₹1,25,000, plus 4% cess. What is the tax payable? (a) ₹37,500 (b) ₹39,000 (c) ₹55,250 (d) ₹85,000

Show the solution

Deduct the exemption: ₹4,25,000 − ₹1,25,000 = ₹3,00,000.
Apply 12.5%: ₹3,00,000 × 12.5% = ₹37,500.
Add 4% cess: ₹37,500 × 4% = ₹1,500.
Total: ₹37,500 + ₹1,500 = ₹39,000.
Option (a) forgets cess. Option (c) skips the exemption and adds cess. Option (d) uses 20% on the full gain.

Answer: (b) ₹39,000

Example 2

An NRI earns short-term capital gain of ₹2,00,000 on listed equity shares in a PMS portfolio, with STT paid. TDS is at 20% plus 4% cess. Assume no surcharge. What TDS must the portfolio manager deduct? (a) ₹25,000 (b) ₹26,000 (c) ₹40,000 (d) ₹41,600

Show the solution

The investor is a non-resident, so Section 195 applies and TDS is deducted by the payer.
Tax at 20%: ₹2,00,000 × 20% = ₹40,000.
Cess at 4%: ₹40,000 × 4% = ₹1,600.
TDS = ₹40,000 + ₹1,600 = ₹41,600.
Option (c) forgets cess. Options (a) and (b) use 12.5%, which is the long-term rate.

Answer: (d) ₹41,600

Exam tips

Look at the investor category in the first line of the question. Most wrong answers come from using the wrong category.
When the question mentions a country treaty, look for the word TRC or Form 10F. These decide whether the DTAA benefit is available.
Check whether the gain is short term or long term using the holding period: 12 months for listed shares. The rate changes with it.
Do not skip the cess. Look at the option list and see if one option equals another multiplied by 1.04.
Rates and thresholds are revised in Budgets. Use the rates in your latest NISM workbook and notes, and stick to them for the exam.

Practice questions from Taxation (NISM XXI-A)

Taxation of NRIs and Other Investor Categories: frequently asked questions

How is an NRI taxed on a PMS investment in India?

An NRI is taxed only on income received in India or arising in India. Gains, dividends and interest from the PMS portfolio are taxable here, and the portfolio manager deducts TDS at source. The rate depends on the type of income and its holding period.

What is DTAA and how does an NRI claim its benefit?

DTAA is a treaty between India and another country to avoid taxing the same income twice. The NRI normally gives a Tax Residency Certificate from the home country and Form 10F. The investor gets the lower of the Income-tax Act rate or the treaty rate.

Is TDS deducted on capital gains of NRIs?

Yes. Section 195 requires TDS on capital gains and other sums chargeable in India that are paid to a non-resident. The rate in force, with surcharge and 4% cess, applies. The NRI can apply for a lower deduction certificate under Section 197.

How are HUFs, companies and trusts taxed in PMS?

A HUF is taxed like an individual at slab rates. A company pays corporate tax rates with no basic exemption. A trust is taxed based on its type: a charitable trust can be exempt if it meets the conditions, while a discretionary trust is generally taxed at the maximum marginal rate.