TDS Portfolio Management

TDS Portfolio Management Services

Portfolio Management Services (PMS) has emerged as a popular investment scheme over the past few years. PMS typically offers the investors customised investments in equity markets with an objective to earn high returns. This portfolio is managed by a portfolio manager keeping track of the equity markets. The PMS could either be discretionary or non-discretionary, depending on whether the investment is at the discretion of the fund manager and whether the client can intervene in the investment process. This has higher transparency of information and, unlike the mutual fund manager, the manager has higher flexibility in controlling the downside of the portfolio value.

Taxation of gains from PMS under the I-T Act has been a matter of debate.Various courts/tribunals have had conflicting views on the taxability of gains from PMS. There is a difference of opinion on characterisation of gains from PMS as business income or capital gains. The tax laws do not prescribe any specified duration of holding or frequency of trading for tax characterisation and tax officers use their own best judgment to arrive at a decision. This has been a source of dispute between investors and the taxman.

Generally, at the time of appointing the PMS provider, the taxpayer spells out the 'Investment Objective' in the discretionary PMS agreement. If the intention is to achieve a reasonable return over a long-term by investing in a focused portfolio stocks with good growth prospects across various sectors, then the income from PMS may result into capital gains and not business income. Therefore, it is important to understand intention of the taxpayer in appointing the portfolio manager, whether the intention is to invest a corpus in shares and securities for wealth creation or to maximise the profit. This will decide the characterisation of such income, i.e., business income or capital gains. Further, it is also important to take into consideration that the decision regarding investments, its timings, etc, are made by the PMS provider or by the taxpayer and the fact that such decisions taken by the PMS provider are not client-specific, but is taken for a whole range of clients in his portfolio.

The above discussion clearly shows that the characterisation of income from PMS either as business income or as capital gains has been a matter of debate, mainly since it is a fact-based analysis. While the courts/tribunal have laid down the principles to differentiate between the two kinds of transactions, there are still grey areas that have left room for interpretation. In order to reduce this litigation, it is desirable to have more clarity from CBDT to attain some element of certainty in the tax treatment. Clarification with respect to period of holding, volume, etc, would be welcome to avoid litigation.