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4Investor Tax Planning
Wealth & Treasury Management

PMS & AIF Tax Planning

PMS/AIF Tax

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Regulatory Framework

This service spans two distinct regulatory regimes that must be read together.

Portfolio Management Services are governed by the SEBI (Portfolio Managers) Regulations, 2020, effective 21 January 2020 (replacing the 1993 regulations). These set a minimum investment amount of ₹50 lakh per client — raised from the earlier ₹25 lakh floor — below which a portfolio manager cannot accept a client's funds or securities, and govern the discretionary, non-discretionary, and advisory categories of registered portfolio managers.

Alternative Investment Funds are governed by the SEBI (Alternative Investment Funds) Regulations, 2012, which create three categories: Category I (venture capital, SME, infrastructure, social-venture, and angel funds), Category II (private equity and debt funds, without leverage beyond permitted limits), and Category III (funds employing complex or leveraged trading strategies, including hedge funds).

The tax treatment differs sharply by category under Section 115UB of the Income-tax Act, 1961: Category I and Category II AIFs receive statutory pass-through status — income of the fund (other than business income) is taxed directly in the hands of investors, in the same head and proportion in which it accrued to the fund, with the fund itself exempt under Sections 10(23FBA)/10(23FBB) and only required to withhold tax at source. Category III AIFs do not enjoy this pass-through; they are instead taxed at the fund level, typically as an association of persons at the maximum marginal rate, with investors not separately taxed on the same income.

This Category I/II versus Category III distinction — not the general SEBI AIF Regulations 2012 framework — is the single most common point of confusion in AIF-linked tax planning, and is the anchor we lead with in client conversations. These provisions are understood to be retained in substance under the Income-tax Act, 2025 (effective 1 April 2026).

Overview

PMS and AIF tax planning is the tax structuring of the investments in the Portfolio Management Services and the Alternative Investment Funds under the Income-tax Act 1961 — the taxation of the gains from the PMS at the rates for the capital gains with the holding periods, the pass-through taxation of the AIF Category III under Section 115UB with the tax at the fund level and the credit to the investors, the distribution and the redemption positions, and the reporting in the returns. The tax treatment differs materially between the direct investing, the PMS and the AIFs, and the planning is the management of the after-tax returns.

The PMS and the AIF are the vehicles through which the HNIs and the institutions invest in the markets, and their tax treatment is decided by the structure and the holding. The PMS gains are the investor's own capital gains with the indexation and the holding periods; the Category III AIF is taxed at the fund level under Section 115UB with the business income treatment, the pass-through to the investors and the credit for the tax paid. Each structure carries a different tax, and the planning is the choice of the structure and the management of the realisations.

The cost of unplanned PMS-AIF tax is the after-tax return erosion: the gains realised without the holding-period planning, the AIF distributions taxed without the credit structure, the redemptions that trigger the tax at the wrong time — each a leak in the returns the structure was meant to deliver.

This service is for HNIs and institutions invested in PMS and AIFs. We map the portfolio's tax positions under the Act, plan the holding periods and the realisations for the capital gains, manage the AIF pass-through and the Section 115UB credit, plan the distributions and the redemptions, and manage the reporting in the returns so the after-tax returns are the returns the investor planned.

How It Works

  1. 1

    Portfolio Tax Mapping

    We map the PMS and the AIF positions against the Act.

    Harun Raaj & Associates does this1 week
  2. 2

    Capital Gains Planning

    We plan the holding periods and the realisations for the gains.

    Harun Raaj & Associates does this1 week
  3. 3

    AIF Pass-Through & Credit

    We manage the Section 115UB pass-through and the tax credit.

    Harun Raaj & Associates does this1 week
  4. 4

    Distribution & Redemption

    We plan the distributions and the redemptions for the tax timing.

    Harun Raaj & Associates does thisAs required
  5. 5

    Return Reporting

    We manage the reporting of the PMS and the AIF positions in the returns.

    Harun Raaj & Associates does thisAnnual

Frequently Asked Questions

How are my PMS returns taxed — does the fund manager handle the tax reporting?
Under a Portfolio Management Service, the securities are held in the client's own demat account, so all capital gains accrue directly to the client and must be reported in the client's ITR under Schedule CG. The fund manager is not responsible for your tax filings. Short-term capital gains on listed equities held less than 12 months are taxed at 20% under Section 111A of the Income Tax Act 1961 (as amended by Finance Act 2024, effective July 23, 2024), and long-term gains exceeding ₹1.25 lakh per year are taxed at 12.5% under Section 112A. PMS transaction statements often bundle scrip-level trades that must be individually reconciled — a common source of under-reporting that triggers scrutiny under Section 143(2).
What is the tax treatment of Category II AIF income in my hands as an investor?
Category II AIFs are pass-through vehicles under Section 115UB of the Income Tax Act 1961: income (other than business income) retains its character and is taxed in the investor's hands as if the investor had earned it directly. The AIF must file a Statement of Income Distribution in Form 64B with the Income Tax Department. Losses from a Category II AIF can be passed through and set off by the investor against income of the same nature, subject to the normal set-off rules under Chapter VI. The AIF deducts tax at source on distributed income under Section 194LBB at 10% for resident investors and at applicable treaty or 40% rates for foreign investors.
My AIF is Category I (infrastructure debt fund). Is the interest income I receive exempt or taxable?
Interest income from a Category I AIF classified as an Infrastructure Debt Fund is taxable in the investor's hands under Section 115UB read with Section 10(47) of the Income Tax Act 1961 — Section 10(47) exempts the fund entity itself but does not exempt distributions to investors. The AIF deducts TDS on interest distributions at 5% for non-resident investors under Section 194LBA and at 10% for resident investors under Section 194LBB. Investors must include the gross distribution (before TDS) in their income and claim the TDS credit in their ITR. Proper co-ordination between the AIF's Form 64C (investor-level allocation certificate) and the investor's Schedule TDS is essential to avoid double taxation or mismatch notices.
Can I claim a deduction for management fees paid to my PMS manager?
Management fees paid to a PMS manager are not deductible as a cost of acquisition or cost of improvement under Section 48 of the Income Tax Act 1961 for capital gains computation purposes. The Supreme Court in CIT v. Escorts Finance Ltd has affirmed that only expenditure directly connected to the transfer is deductible under Section 48(i). Some assessees have claimed PMS fees as a business expense under Section 37(1) where the investment activity constitutes a business, but this requires that the portfolio is held as stock-in-trade, not as capital assets — a fact-specific determination that must be supported by documentation and consistent return filings. Any misclassification risks disallowance and penalties under Section 270A.
How does the surcharge on LTCG from AIF units affect my effective tax rate as a HNI?
For resident individuals with total income exceeding ₹5 crore, the surcharge rate is 37% under Section 87 of the Income Tax Act 1961 (pre-Finance Act 2023 rates still apply for AY 2026-27). However, for long-term capital gains on units of equity-oriented funds or listed securities taxable under Section 112A, the surcharge is capped at 15% by virtue of Section 112A read with the Finance Act 2022 amendment. For other LTCG from AIF units (e.g., unlisted securities via a Category III AIF) taxable under Section 112, no such surcharge cap applies, and the effective rate can reach 28.496% (20% tax + 37% surcharge + 4% cess). Proper categorisation of the underlying asset class at the AIF level — confirmed via Form 64B — is therefore critical to computing your correct effective rate.

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