PMS and AIF Taxation in India: How Your Portfolio Management and Alternative Fund Income Is Taxed (AY 2026-27)

If you have crossed the ₹50 lakh mark that gets you into a Portfolio Management Service, or the ₹1 crore ticket that gets you into an Alternative Investment Fund, your tax return has quietly changed shape.

These are not mutual funds. A mutual fund gives you one clean number at redemption. PMS and AIFs give you either hundreds of individual transactions or a fund-level statement written in the language of the Income Tax Act, and the two are taxed in completely different ways.

Getting this wrong is expensive, because these are exactly the portfolios the department cross-checks against AIS.

The One Distinction That Drives Everything

In a PMS, the shares sit in your demat account under your PAN. The manager is your agent, not a separate taxpayer. In an AIF, you own units of a pooled vehicle, and the law decides whether the fund's income flows through to you or stops at the fund.

Part 1: How PMS Income Is Taxed

Every trade the manager makes is your trade

There is no such thing as "PMS income" as a head of income. If your discretionary manager sold 400 shares of a company in November, that sale is your capital gain, taxable in AY 2026-27, whether or not a single rupee was paid out to you.

This is the single biggest surprise for first-year PMS investors: you can owe tax on a portfolio that has not distributed anything, purely because the manager rebalanced.

Capital gains or business income?

High-churn PMS strategies raise the question of whether the gains are capital gains or business income. CBDT Circular 6/2016 settled most of it: for listed shares held for more than 12 months, if you choose to treat the gains as capital gains, the assessing officer must accept that position, provided you stay consistent in later years.

For shorter holdings, the usual tests apply, and courts have repeatedly held that a discretionary PMS where the intent is investment produces capital gains, not business income. The practical rule: pick a treatment, and do not flip it year to year to suit the result.

The rates that apply for FY 2025-26

Surcharge on capital gains taxed under Sections 111A, 112 and 112A is capped at 15%, even where your other income attracts a higher rate. Your fund manager's statement will not apply this cap for you. The capital gains rules for stocks and mutual funds apply to a PMS portfolio exactly as they do to shares you bought yourself.

A worked example

Take a ₹75 lakh PMS account in FY 2025-26 where the manager churns roughly a third of the portfolio:

Nothing was withdrawn from the account all year. The tax is still due, and most of it should have gone out as advance tax.

The PMS fee trap

PMS providers charge a fixed management fee, and often a performance fee of 10% to 20% over a hurdle rate. On a ₹75 lakh portfolio that is easily ₹1.5 lakh to ₹3 lakh a year.

Tribunals have consistently held that these fees are not deductible against capital gains. They are neither part of the cost of acquisition nor an expense incurred wholly and exclusively in connection with the transfer, which are the only two deductions Section 48 allows.

What you can include is what attaches to individual trades: brokerage, and the cost of acquisition itself. Securities Transaction Tax is specifically not deductible.

So the return you see in your PMS performance report is a pre-tax, post-fee number, while your tax is computed on a figure that ignores the fee entirely. Budget for that gap.

Dividends and interest inside the portfolio

Dividends on shares held in a PMS are your dividends. They are taxed at your slab rate, and the company deducts TDS at 10% under Section 194 once dividends to you cross ₹10,000 in a financial year. They will show up in your AIS under your own PAN, not the manager's, so they must be reported even though you never handled the money.

Reporting it

PMS gains go into Schedule CG of ITR-2, transaction by transaction for equity where the schedule demands scrip-wise detail for Section 112A. Your provider issues an annual capital gains statement in roughly the format the ITR expects. If you have taken the business-income position instead, you move to ITR-3.

49Tax's AI can read a PMS capital gains statement alongside your Form 16 and broker statements and map the long-term, short-term and dividend lines into the right schedules, which is where most manual filings go wrong.

Part 2: How AIF Income Is Taxed

Category I and II: the pass-through

Venture capital funds, infrastructure funds, private credit and most private equity funds fall in Categories I and II. Section 115UB gives them pass-through status: income earned by the fund is taxed in your hands as though you had earned it directly, retaining its original character.

Interest earned by a private credit fund is interest income in your hands, taxed at slab. Capital gains on the fund's exit from a portfolio company are capital gains in your hands, at capital gains rates.

Two things break the neatness:

• Business income is not passed through. Any income the fund earns under the head "profits and gains of business" is taxed at the fund level at the maximum marginal rate, and reaches you tax-free.
• TDS applies at 10% under Section 194LBB on the income credited to you, whether or not it is distributed. Claim it in your return like any other TDS.

The word credited matters. Just as with a PMS, you can be taxed on income you have not received, because the fund credited it to your account in its books.

Losses in a Category I or II AIF

Business losses stay at the fund level and cannot be passed to you. Other losses can be passed through, but only if you have held your units for at least 12 months. Exit earlier and the loss is stranded in the fund.

Category III: the fund pays, usually

Long-short funds, listed equity strategies and most hedge-fund-style AIFs are Category III, and they have no pass-through regime.

In practice, a Category III AIF set up as a trust is taxed at the fund level, frequently at the maximum marginal rate, and you receive income net of that tax. You generally do not pay again on the same income, but the treatment depends on how the trust is structured and what its deed says about your share.

Two consequences worth understanding before you invest:

1. Character is lost. Long-term equity gains that would have cost you 12.5% in your own hands can be taxed at the fund's rate. The headline return is not comparable to a PMS return.
2. You cannot set off your own losses against income that was already taxed at the fund level.

Always read the fund's tax note and its annual statement rather than assuming your own slab applies.

Form 64C is your source document

Category I and II AIFs must file Form 64D with the tax department by 15 June and issue Form 64C to each investor by 30 June, showing your share of income under each head, and the tax deducted.

Form 64C is to an AIF investor what Form 16 is to a salaried employee. Do not file until you have it, and reconcile every line in it against your AIS.

Three Things That Trip Up PMS and AIF Investors

Advance tax. Capital gains and fund credits are not covered by salary TDS, and 10% under Section 194LBB rarely covers the real liability. Capital gains get one concession: you only need to pay the tax in the instalment falling due after the gain arises, not spread across earlier instalments. Miss it and you pay interest under Sections 234B and 234C. See the advance tax due dates and rules.

Schedule AL. If your total income exceeds ₹1 crore, you must disclose assets and liabilities, and PMS holdings and AIF units belong there, valued at cost. This ties into the wider surcharge and Schedule AL rules for high earners.

Offshore feeder funds. If your AIF exposure is through a fund incorporated outside India, Schedule FA reporting is triggered regardless of whether the investment produced income, and the penalties there are governed by the Black Money Act, not the Income Tax Act.

The Takeaway

The rule that matters is simple: in a PMS you are taxed on what the manager does, and in an AIF you are taxed on what the fund reports.

Before your next filing, pull three documents: the PMS annual capital gains statement, Form 64C from every Category I or II AIF, and the tax note from any Category III fund. Reconcile all three against your AIS in June, not in September. Then check whether your advance tax instalments actually covered the gains your manager booked, because that interest bill is the one avoidable cost in this entire structure.