Taxation between Mutual Funds and PMS.

 Taxation for Portfolio Management Services (PMS)

You are taxed as if you made the investments directly, on your own.

Long-term capital gains tax (LTCG) of 10% applies to profits from listed stocks held for more than 12 months.

Short-term capital gains tax (STCG) of 15% applies to profits from listed stocks held for less than 12 months.

You must include these gains/losses in your tax return.

Taxation for Mutual Funds (MF)

You are taxed on the difference between the selling price and acquisition cost of the MF units, depending on the type of MF you invested in.

LTCG tax of 10% applies to profits from MF units held for more than 12 months.

STCG tax of 15% applies to profits from MF units held for less than 12 months.

You pay tax when you sell your MF units, not when the MF itself makes a profit.

Key difference:

In PMS, you pay tax on profits from individual stocks. Every time your portfolio manager sells a stock at a price higher than the purchase price, a tax liability arises.

In MF, you pay tax on profits from the MF as a whole. The tax liability arises when you sell your mutual fund units at a price higher than your purchase price. 

Example:

You invested Rs 50 lakh in a PMS and the portfolio manager bought a stock for Rs 50 per share in your portfolio on 3rd January, 2022. On 6th January, 2023 the portfolio manager sold the stock at Rs 75 per share thus registering a long term capital gain of Rs 25 lakh. You would need to pay 10%, i.e. Rs 2.5 lakh, tax on this gain. 

Instead of investing in a PMS as above, suppose you had invested Rs 50 lakh in a mutual fund on 3rd January 2022. The NAV went up from ₹10 per unit to ₹15 per unit on 6th January, 2023 when you redeemed your units. Your profits were Rs 25 lakh. Thus you would need to pay a long term capital gains tax of Rs 2.5 lakh ( 10% of Rs 25 lakh). 

In this simplified case, in both the instances the tax outgo is same. However in real life there may be nuances – like selling the stock or mutual fund units after holding for less than 12 months which may tilt the arithmetic. Apart from this, there are other factors too that may affect your tax liability, such as your income tax bracket and other investments.

In PMS investors own the stocks so the profit and loss can be hedged by their other profit and loss in other direct ownership. In MF one does not own the stock but the fund unit. 

 Please consult a tax advisor for specific advice.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

When placing your order in Mutual Funds, kindly select "YES" when prompted if you are assisted. You will need to input my Employee Unique Identification Number. EUIN: E484653 and ARN 259045.

WhatsApp, 📞 9845211825, inbox here for hassle-free online investing in Mutual Funds.

Prajval Madhav Uchil 

Mutual Fund Distributor. 

EUIN: E484653 l ARN 259045.

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