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

For a PMS client in the discretionary portfolio management route, how are the gains from selling listed equity shares generally treated for income tax purposes?

The gains belong to the client, who is the beneficial owner of the securities in a PMS account. The portfolio manager only manages them, so the client is liable for tax on realised gains. They are not taxed on closure, and they are not exempt.

  1. AThe portfolio manager pays the tax on the client's behalf out of its own income
  2. BThe gains are treated as the client's income, and the client is liable for tax on themCorrect
  3. CThe gains are tax-exempt because the portfolio manager holds the securities
  4. DThe gains are taxed only when the client closes the PMS account

Explanation

A PMS account is not a separate taxable entity. Securities are held for the client, who is the beneficial owner. Gains on each sale are therefore the client's income and are taxed in the client's hands. The portfolio manager does not pay the tax from its own income, and gains are not deferred until account closure.

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