Let’s be honest — taxation is the part of PMS and AIF investing that most people quietly dread.
You’ve picked a good portfolio manager, you understand the strategy, and then tax season arrives, and suddenly you’re staring at a stack of transaction statements wondering what actually needs to go into your return.
This guide is here to fix that. We’ll walk through exactly how PMS and AIF investments are taxed for FY 2026-27, what’s changed with the new Income-tax Act, 2025, and how it all compares to plain old mutual funds — in plain English, with the actual numbers.
A quick but important note before we start: tax rules affect every investor differently based on income level, residency status, and portfolio composition.
This article explains the framework as it stands for FY 2026-27, but it isn’t a substitute for advice from a qualified Chartered Accountant who can look at your specific situation.
What’s New for FY 2026-27: The Income-tax Act, 2025
The biggest structural change this year isn’t a new tax rate — it’s a new law. From April 1, 2026, India moves from the six-decade-old Income Tax Act, 1961, to the Income-tax Act, 2025.
This is largely a simplification exercise rather than a rewrite of how much tax you pay, but there’s one change worth knowing: the familiar terms “assessment year” and “previous year” are being replaced with a single, simpler concept — the “tax year” — defined as the period from April 1 to March 31.
So if you see “tax year 2026-27” instead of “AY 2027-28” on your tax portal or in your PMS/AIF statements going forward, that’s not an error — that’s the new terminology under the Income-tax Act, 2025.
Beyond the terminology shift, the government has also increased the Securities Transaction Tax (STT) on Futures & Options (F&O) in Budget 2026, which raises transaction costs for any AIF strategy that trades derivatives — something Category III AIF investors in particular should be aware of.
Always compare returns after adjusting for tax rather than the pre-tax figure most factsheets lead with.
How Mutual Funds Are Taxed (The Baseline)
Before comparing PMS and AIF, it helps to remember how mutual funds work, since most investors already have some familiarity here.
Equity mutual funds: Long-Term Capital Gains (holding period over 12 months) are taxed at 12.5%, with gains up to ₹1.25 lakh in a financial year exempt. Short-Term Capital Gains (under 12 months) are taxed at a flat rate.
Debt mutual funds: Taxed as per your income tax slab rate, regardless of holding period, following the removal of indexation benefits in earlier reforms.
Key point: You are only taxed when you actually redeem your units. The fund manager buying and selling stocks inside the fund doesn’t create a taxable event for you.
That last point is exactly where PMS becomes fundamentally different — and it trips up a lot of first-time PMS investors.
How PMS Gains Are Actually Taxed
Here’s the part that surprises most people moving from mutual funds to PMS: because you directly own the underlying shares in your own Demat account, every single transaction your portfolio manager makes is a taxable event in your hands — even though you never personally placed the buy or sell order.
If your PMS manager sells a stock in March and buys it back in April as part of an active rebalancing strategy, that sale is a capital gains event for you, full stop — regardless of whether you agreed with the timing or even noticed it happened.
How PMS capital gains are taxed for FY 2026-27:
Long-Term Capital Gains (holding period over 12 months for listed equity): 12.5%, with the ₹1.25 lakh annual exemption applying in the same way as mutual funds.
Short-Term Capital Gains (holding period under 12 months): Taxed at a flat short-term rate, currently 20%.
Your PMS provider will typically issue a detailed Capital Gains Statement at year-end listing every transaction — this is the document your CA will need, and it’s usually far longer than a mutual fund’s redemption statement, simply because of transaction volume.
Practical tip: Since PMS portfolios can involve dozens of transactions across a year, don’t wait until July to think about your PMS tax filing.
Request your capital gains statement from your provider as soon as the financial year closes, so your CA has enough runway to reconcile everything properly.
How fees affect your taxable gains is easy to miss — a high profit-sharing fee reduces the capital gains you’ll eventually be taxed on.
AIF Taxation: Why It Depends Entirely on the Category
This is where things genuinely diverge from both mutual funds and PMS, because AIF taxation isn’t one rule — it’s three different rules depending on which category your fund falls under.
Category I & II AIF Taxation
Category I AIFs (venture capital, SME funds, social venture funds) and Category II AIFs (private equity, debt funds, structured credit) benefit from what’s called pass-through taxation — meaning the fund itself generally doesn’t pay tax on your behalf; the income is taxed in your hands, similar in spirit to how mutual funds work.
An important clarification that’s now settled: gains made by Category I and II AIFs on the transfer of securities are treated as capital gains, taxed at 12.5% — not as business income, which could otherwise attract tax rates as high as 39%.
This removed a long-standing ambiguity that used to create genuine uncertainty for investors and fund managers alike.
Category III AIF Taxation
Category III AIFs (hedge funds, long-short equity strategies, funds using derivatives and leverage) work differently.
These funds are typically taxed at the fund level itself, not passed through to individual investors in the same way.
The exact tax treatment depends on the fund’s legal structure (trust vs LLP vs company) and the nature of its underlying strategy — this is genuinely one of the more complex corners of Indian investment taxation, and it’s an area where getting professional advice before investing (not after) makes a real difference.
AIF Taxation at a Glance
| AIF Category | Typical Strategy | Tax Treatment | Applicable Rate |
| Category I | Venture capital, SME funds, social venture funds | Pass-through to investor; capital gains on securities | 12.5% (LTCG on qualifying securities) |
| Category II | Private equity, debt funds, structured credit | Pass-through to investor; capital gains on securities | 12.5% (LTCG on qualifying securities) |
| Category III | Hedge funds, long-short equity, derivative-heavy strategies | Typically taxed at fund level, structure-dependent | Varies by fund structure |
STT Hike on F&O: What It Means for AIF Investors
Budget 2026 increased the Securities Transaction Tax on Futures & Options trading.
For most PMS and Category I/II AIF investors, this has limited direct impact since these strategies aren’t typically derivative-heavy.
But if you’re invested in a Category III AIF running a long-short or derivatives-based strategy, this raises the fund’s underlying transaction costs — which can, in turn, slightly compress net returns even before any tax is calculated on your gains.
It’s worth asking your AIF manager directly how the STT change affects their specific strategy’s cost structure going into FY 2026-27.
Buyback Taxation Changes and Why PMS Investors Should Care
Another Budget 2026 change worth flagging: income from share buybacks is now taxed as capital gains in the hands of the shareholder, with the original cost of acquisition allowed as a capital loss.
Since PMS portfolios directly hold individual stocks, and Indian companies periodically conduct buybacks, this change directly affects how PMS investors should account for any buyback proceeds received during the year — it’s no longer treated as dividend income the way it used to be.
TDS: What Gets Deducted and When
Tax Deducted at Source (TDS) works differently depending on the vehicle and your residency status:
Resident investors in PMS generally don’t face TDS on capital gains at the transaction level — you self-assess and pay advance tax based on your PMS capital gains statement.
AIF distributions may attract TDS depending on the category and the nature of the income being distributed — your AIF manager’s investor communication will specify this.
NRI investors face TDS at source on both PMS and AIF gains, at rates that can be higher than resident rates unless a Double Taxation Avoidance Agreement (DTAA) benefit is claimed — more on this below.
Always cross-check the TDS certificate (Form 16A) your PMS/AIF provider issues against what actually shows up in your Form 26AS before filing — mismatches here are one of the most common causes of tax notices for PMS/AIF investors.
Set-Off and Carry Forward of Losses
A question we hear constantly: “I made a loss in my PMS this year but gains in my mutual funds — can I offset one against the other?”
Generally, yes — capital losses (short-term or long-term) can be set off against capital gains of the same nature across different investment vehicles, since the Income Tax Act treats capital gains as a single head of income, not a vehicle-specific one.
So a short-term loss in your PMS can typically be set off against short-term gains in your mutual funds, and long-term losses can offset long-term gains, subject to the standard set-off and carry-forward rules (losses can be carried forward for up to 8 tax years, but only if you’ve filed your return on time).
Category III AIF losses are the exception worth flagging — since these are often taxed at the fund level rather than passed through to you, you may not be able to personally claim or offset those losses the way you can with PMS or Category I/II AIF losses.
This is a strategy-specific detail worth confirming directly with your fund before assuming you have loss-offset flexibility.
Taxation for NRIs Investing in PMS/AIF
NRIs investing in PMS and AIF in India need to factor in a few additional layers:
TDS is deducted at source on capital gains, often at a higher rate than what a resident investor would face on the same gain.
DTAA benefits may reduce the effective tax rate if India has a tax treaty with the NRI’s country of residence — this requires submitting the correct documentation (like a Tax Residency Certificate) to claim the lower treaty rate.
Repatriation of PMS/AIF proceeds is governed by FEMA regulations, and the process typically requires a Chartered Accountant’s certificate (Form 15CA/15CB) confirming taxes have been properly paid before funds can be moved out of India.
If you’re an NRI, it’s worth reading this alongside a dedicated FEMA and repatriation guide, since the tax and regulatory pieces are closely linked.
NRI investors face additional rules under FEMA and DTAA that go beyond this domestic tax guide.
Full Comparison: PMS vs AIF vs Mutual Fund Taxation for FY 2026-27
| Parameter | Mutual Funds | PMS | AIF (Cat I & II) | AIF (Cat III) |
| Taxable Event | Only on redemption | Every transaction the manager makes | Pass-through to investor | Usually taxed at fund level |
| LTCG Rate | 12.5% (equity, >₹1.25L exempt) | 12.5% (listed equity, >12 months) | 12.5% on qualifying securities | Varies by fund structure |
| STCG Rate | 20% (equity) | 20% | Passed through, taxed per applicable rate | Varies by fund structure |
| Filing Complexity | Low — one redemption statement | High — detailed transaction-level statement | Moderate — pass-through statement from fund | Low for investor (fund handles it) but structure-dependent |
| Loss Set-Off | Standard capital gains set-off rules | Standard capital gains set-off rules | Standard capital gains set-off rules | Often restricted — confirm with fund |
| TDS for NRIs | Applicable | Applicable | Applicable, DTAA benefits available | Fund-level, structure-dependent |
Common Tax Filing Mistakes PMS/AIF Investors Make
- Treating PMS like a mutual fund at tax time — forgetting that every internal transaction is a separate taxable event, not just the final withdrawal.
- Missing the buyback tax reclassification — still reporting buyback proceeds as dividend income under old habits.
- Not reconciling TDS certificates against Form 26AS, leading to mismatches and unnecessary tax notices.
- Assuming Category III AIF losses can be personally offset, without first checking the fund’s actual tax structure.
- NRIs skipping DTAA documentation, ending up paying a higher TDS rate than necessary simply because the Tax Residency Certificate wasn’t submitted in time.
Frequently Asked Questions
Is AIF Category III taxed differently from Category I and II?
Yes. Category I and II AIFs generally offer pass-through taxation, where capital gains are taxed in the investor’s hands at 12.5% on qualifying securities.
Category III AIFs are typically taxed at the fund level, with treatment depending on the fund’s legal structure.
Do I need to report every PMS transaction separately in my tax return?
Your capital gains are typically reported as consolidated short-term and long-term totals, but these totals are built from every individual transaction your portfolio manager executed during the year — which is why the capital gains statement from your PMS provider is essential for accurate filing.
How are NRIs taxed on PMS and AIF income in India?
NRIs face TDS at source on capital gains from both PMS and AIF investments, though the effective rate may be reduced under an applicable DTAA if the correct documentation, such as a Tax Residency Certificate, is submitted.
What is the new “tax year” terminology I’m seeing this year?
From FY 2026-27, the Income-tax Act, 2025 replaces the older “assessment year” and “previous year” terms with a single unified concept called the “tax year,” running from April 1 to March 31.
Can I offset a PMS loss against mutual fund gains?
Generally yes, since capital gains and losses are treated as a single head of income across investment vehicles, subject to standard short-term/long-term matching and carry-forward rules.
Note: This article provides general information on PMS and AIF taxation for FY 2026-27 based on the current tax framework and is not personalised tax advice. Tax treatment can vary based on individual circumstances, fund structure, and residency status. Please consult a qualified Chartered Accountant before making investment or filing decisions.