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

Which of the following is generally true of the fee paid by a PMS client to the portfolio manager for portfolio management services, as regards the client's tax computation?

A PMS management fee is generally not a deduction when computing capital gains for an investor, because only acquisition cost and transfer expenses qualify. It may be claimed as a business expense where the portfolio is held as part of business or profession.

  1. AIt is always deductible from salary income of the client
  2. BIt cannot be taken into account for any computation of income
  3. CIt may be allowed as an expense if the client's income is from business or profession, but not against capital gains computation as a general deductionCorrect
  4. DIt is automatically refunded by the tax authorities

Explanation

Capital gains are computed by deducting only the cost of acquisition, cost of improvement and expenditure wholly and exclusively in connection with the transfer, so a general management fee is not a deduction against capital gains for an investor. Where the client's income is business or profession income, a fee incurred for that business may be claimed as an expense. The other options misstate the position.

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