PMS is a pass-through vehicle from a tax perspective.
Pass-through PMS Taxation: Since under a PMS, investments are held directly in the investor’s name (and not via a trust like in a MF or AIF), the tax liability for the PMS investor is the same as the investor directly buying or selling shares/securities in his own name.
Accordingly, the taxation of PMS investments are as follows:
Interest Income: added to the income tax slab
Equity Capital Gains: 20% (ST – less than 1 year holding) / 12.5% (LT – greater than 1 year holding with a 1.25 lakh exemption)
Other Forms of Capital Gains: will be taxed based on the nature of the gains.
Equity Dividend Income: added to income tax slab
AIF Taxation
Taxation of AIF’s are based on 2 factors:
- AIF Classification
- Fund Legal Structure
AIF Classification
Alternate Investment Funds (AIFs) are categorized as follows:
- Category I (CAT 1): Funds that invest in start-up or early-stage ventures. This extends to social ventures or SMEs or infrastructure or other sectors or areas that the government or regulators consider as socially or economically desirable.
- Category II (CAT 2): Funds that do not fall under CAT 1 and CAT 3, do not undertake leverage or borrowing.
- Category III (CAT 3): Funds that employ diverse trading strategies. They use leverage through listed and unlisted derivatives and buy stocks or other allowed assets.
Fund Legal Structure
SEBI regulations permit an AIF to be set up in the form of a trust, a company, a limited liability partnership, or a body corporate.
Even as the tax structure for trust’s is not as favorable as other corporate structures, it remains the most popular structure used by AIF’s due to the relative ease of introducing new investors.
Taxation of Cat 3 AIFs (Non-trust structures)
Cat-3 AIFs are NOT pass-through vehicles, and Cat-3 AIFs are taxed at the AIF level itself. The taxation rate depends on the type of income:
- Business Income / Non-equity ST & LT Capital Gains from Unlisted Assets / Dividend Income: Tax slab based on structure
- ST Equity Capital Gains: 20%
- LT Equity Capital Gains: 12.5%
Taxation of Cat 1 & 2 AIFs (Non-trust structures)
Cat 1 & Cat 2 AIF’s are considered as pass-through vehicles for a taxation perspective. Any capital gains from the AIF are taxed directly in the hands of the investor.
However, if the AIF income includes business income, this business income is taxed in the hands of the investor. The tax applicable depends on the legal form of the AIF – 30% for LLPs and 25% for Pvt Ltd companies.
Taxation of AIF’s set up as Trusts
The taxation of AIF’s set up as a trust depends on 2 factors: (a) whether the AIF earns business income and (b) whether the trust is Determinate or Indeterminate
- Income includes Business/Profession Income: Taxed as Maximum Marginal Rate
- Indeterminate Trust (beneficiaries not defined at the time of set-up): Taxed as Maximum Marginal Rate
- Determinate Trust (beneficiaries taxed at the time of setup): The fund pays tax at the rate applicable for each beneficiary on his/her share of income