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

In the case of a PMS client, which of the following statements about how the portfolio manager's discretionary portfolio is treated for income tax purposes is correct?

The client is treated as the owner of the securities, so the gains and income from the PMS portfolio are taxed in the client's hands. Every sale by the portfolio manager is a transfer by the client, and tax is not deferred until the client withdraws money.

  1. AThe portfolio manager is taxed on the gains as the owner of the securities
  2. BThe client is treated as the owner of the securities and is taxed on the gains and income of the portfolioCorrect
  3. CThe PMS entity pays tax on behalf of all clients at a flat rate and the client has no liability
  4. DGains are taxable only when the client withdraws the funds from the PMS

Explanation

In a PMS the securities are held in the client's own name (or for the client's benefit), so the client is the owner. Each sale by the manager is a transfer by the client and gives rise to capital gains in the client's hands. Tax is not deferred until withdrawal, so that option is wrong.

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