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

For a resident individual client of a discretionary PMS, how are the gains arising from the sale of securities by the portfolio manager within the client's portfolio treated for income-tax purposes?

Gains from sales within a PMS portfolio are taxed in the client's hands, because the securities belong to the client. The portfolio manager acts only as an agent, and tax arises in the year of each sale, not on withdrawal or closure.

  1. AThe portfolio manager pays tax on behalf of the client as the legal owner of the securities
  2. BGains are taxed in the hands of the client, as the securities are held in the client's own name or on the client's behalfCorrect
  3. CGains are exempt until the client closes the PMS account
  4. DGains are taxed only when the client withdraws the money from the PMS account

Explanation

In a PMS the securities belong to the client, so each sale by the portfolio manager is a transfer by the client. Capital gains arise in the year of sale and are taxed in the client's hands. Tax is not deferred until withdrawal or account closure, and the manager is not the taxpayer.

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