Tax is one of those words which gives sleepless nights to both; companies and investors alike. If you have either invested in PMS or Mutual Funds you must be going through the same questions regarding taxation on your investment and how is it going to affect your returns.
So, let’s take a look at both PMS and mutual funds.
Mutual funds are a much-preferred investment alternative for investors who are looking for safe and steady returns. It is an investment pool which is managed by professionals, trading only in a diversified range of securities. There are thousands of investors, all pooling in their resources and sharing the risk, and even earning the maximum returns. It is an ideal investment alternative if you are looking for regular and fixed returns, preferred by investors who are close to their retirement age. It involves less risk as compared to other options.
Incomes earned through investment in mutual funds can be taxed under the categories of Capital Gains or Dividend Income.
Dividend income is earned on equity mutual funds only. The dividend income in the hand of the investor is free of tax but, the dividend issuing company has to pay a Dividend Distribution Tax on the gross value of dividend whenever it is announced. If the total dividend earnings of the investor cross the mark of 10 lakh rupees, it is liable to a tax of 10%.
- Equity mutual funds: It is that portfolio where more than 65% of the total money is invested in equities. Here the dividend received from money market instruments is taxed at 25% + surcharge and cess, for the mutual fund schemes.
- Debt mutual funds: These are the other funds where about 35% of the total investment is made in debt instruments in funds of funds and even international funds.
Capital gain is the appreciation or increment in the net value of the securities held by an investor. It arises when the investment is bought and sold by the investor. For instance, if an investor holds 100 units of mutual funds purchased at the beginning of the period at Rs 100 each. The total value comes at Rs 1,00,000; if at the end of the period the market value goes up to Rs 150, the total valuation comes to Rs 1,50,000. Hence, Rs 50,000 is the capital gain.
- Equity mutual funds: If the fund is held for a time duration of less than 12 months, it is a short term capital gain and hence subjected to a tax of 15%, whereas if the funds are held by the investor for more than 12 months it is considered as a long term capital gain and tax is charged at 10%.
- Debt mutual funds: When debt funds are held for a period less than 36 months or 3 years it is a short term income and the profits are treated as income and included in it. The investor is charged to tax as per the income slab in which he/she belongs. But, if the holding period exceeds 3 years, it is charged at 20% with indexation.
Portfolio Management Services (PMS)
PMS stands for Portfolio Management Scheme. It is a type of service that helps to manage the wealth of investors. The primary aim of PMS is to provide over and above the average returns to the investors. Here one has the option to choose among the limited schemes and opt for personalized services. The minimum investment requirement for this service is Rs 25 lakhs, as determined by SEBI. It is a professional service managed by fund managers who are adept at providing flexibility and freedom to their clients. PMS services are given to the ‘wealthy’ or ‘priority’ clients given the level of minimum investment and the services that are provided. Therefore, the charges or fees that you pay to avail these services are also on the higher end.
On a much broader level, PMS and mutual funds are quite similar. They both include the management of investors money and investing it into a portfolio of various stocks, shares, and other securities. There are a plethora of options available to invest in, all with separate objective and have a designated fund manager to oversee the operations.
PMS is of the following 3 types:
- Discretionary: In this type, the portfolio manager has the autonomy to make all the decisions on behalf of the investor. They can independently manage the portfolio without any interference.
- Non-Discretionary: Here the managers need to take the confirmation from the client before making any decision of buying or selling the securities.
- Advisory: As the name suggests, the portfolio manager here has the primary role of simply giving the advice to the clients regarding the investment decisions.
Usually, the income from PMS is treated as business income. There has been numerous rules and regulations regarding it. The most recent ruling has been given by the Delhi Court stating that the income is to be taxed based on the investment objective.
- Wealth maximization: In this scenario, the investment is made with the sole motive of multiplying the wealth on the investor. Hence, any income arising from this case is taxable under the head Capital Gains as per Income Tax Law.
- Profit maximization: Here, investment is made to sell it at a point of time later on. It is done to encash the profits arising from capital appreciation. The income is taxed as Capital Gains.
Many times, the superlative returns and personalized services attract the investors towards Portfolio Management Services. The portfolio manager can churn out profits, and the costs may seem insignificant if compared to it. But it involves a lot of analyzing and paperwork. So, if you are looking for something much easy and better tracking, then Mutual Funds are the right investment option for you.
The tax regulations for mutual funds are more straightforward and can be managed easily. It generally involves less taxes, and if your fund manager is competent enough to churn out high returns, you have to pay only 15% tax under Capital Gains on your income from mutual funds.