If you avail of portfolio management services (PMS), there is a bad news for you. The Income Tax Appellate Tribunal of Mumbai recently ruled that fund manager's
fee paid by an individual cannot be deducted while calculating capital gains from investments made through PMS for tax purposes.
The order overturns a previous ruling by the Pune Tribunal, which had given relief to an assessee who had claimed deduction of PMS and audit fees of Rs 36.69 lakh against short-term capital gains of Rs 61.55 lakh from shares and mutual funds.
The ruling would affect high net worth individuals who invest through PMS, which offer customised portfolio in various instruments, including shares, mutual funds and debts. The minimum investment through the PMS route is Rs 25 lakh.
According to tax consultants and
PMS fund managers, fee is an expense which can be set off against any other income but not against capital gains.
"Generally, two kinds of costs are deducted from capital gains-the indexed cost of acquisition and expense incurred in transfer of assets," says Divya Baweja, senior director, (personal taxation), Deloitte Touche Tohmatsu India. "The recent ruling is based on this very premise," he adds.
Deduction of indexed cost of acquisition means adjusting the purchase price against inflation, while expenses incurred in transfer of assets include securities transaction tax.
Gains from PMS can be treated as business income or capital gains. If shown as business income, one can claim deduction of PMS fees under the business expenses head. "Since business income is taxed at a higher rate, investors prefer gains from PMS to be declared as capital gains," says Amit Maheshwari, head (direct tax), Ashok Maheshwary and Associates.
Long-term capital gains on equities are tax-free, while short-term capital gains are taxed at 15%. In case of debt investments, long-term capital gains are taxed at 10% without indexation and 20% with indexation. Short-term capital gains get included in taxable income.
Deduction of fund managers' fee have been a grey area. "We ask our clients to talk to their tax consultants for better clarity on the issue," says Sachin Shah, fund manager (PMS), Emkay Global.
