Are PMS Fees Deductible? Tax Rules for Management and Performance Fees

A portfolio management service is not a pooled fund. The shares sit in your own demat account and every sale the manager makes is a taxable event in your hands. That is why pms taxation matters so much, and why one question keeps reaching tax tribunals: if you pay a manager to buy and sell shares for you, can you subtract that fee before computing tax on the gains?

The stakes went up in July 2024. The government raised the tax on short-term gains from listed equity to 20 per cent and set long-term gains at 12.5 per cent, with a ₹1.25 lakh annual exemption for long-term gains. That bites harder for PMS investors because, as Business Standard reported after the 2024 Budget, PMS has no pass-through status and churn is taxed directly in the client's hands.

PMS charges are not small either: a fixed management fee, a performance fee above a hurdle, GST on both, plus brokerage and operating costs. (Fee levels and SEBI's fee rules are covered in separate guides; this article is only about the income-tax treatment of portfolio management fees.)

So the question "are PMS fees deductible?" is not academic. If yes, part of every rupee of fees also reduces your tax; if no, the full fee comes out of post-tax money. The honest answer in October 2026 is: it depends on which tribunal bench you ask, and no High Court or Supreme Court ruling that we found has settled it.

This guide is general information, not tax advice. The law is genuinely unsettled, so speak to a chartered accountant or tax counsel before you take a position in your return.

The dispute crystallised in 2011. In Devendra Motilal Kothari v. DCIT (assessment year 2004-05), the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) refused to allow PMS fees in computing capital gains, essentially because fees charged on the whole portfolio could not be tied to particular purchases or sales.

The Pune bench went the other way. In June 2011, Business Standard reported that the Pune ITAT, in the case of KRA Holding & Trading and a group company that had paid fees to Enam Asset Management, held that the fee was directly connected to the securities and their transfer and was a bona fide payment in the normal course of investment activity. The same report quoted an Ernst & Young tax partner noting that tax authorities do not allow the deduction.

Over the next fifteen years the tribunals produced two parallel lines: a refusal line, mostly from Mumbai benches (Kothari, Pradeep Kumar Harlalka, Homi K. Bhabha, Capt. Avinash Chander Batra, Mateen Pyarali Dholkia and Apurva Mahesh Shah), and an allowing line from Pune, Delhi, Kolkata and some Mumbai benches, detailed below. Neither has been overturned by a higher court.

Meanwhile, in January 2020 SEBI notified new portfolio manager norms that raised the minimum ticket to ₹50 lakh and scrapped upfront fees, leaving recurring fixed fees, performance fees or a mix of both, which are exactly the pms charges whose tax treatment is still argued.

Capital gains are computed by taking the sale consideration and subtracting two things: expenditure incurred wholly and exclusively in connection with the transfer, and the cost of acquisition (plus any cost of improvement). For decades that rule lived in Section 48 of the Income-tax Act, 1961. Everything in the PMS fee debate turns on whether a portfolio manager's fee fits into one of those two buckets.

Taxpayers argue it fits both, in part: the share of the fee relating to purchases is part of acquisition cost, and the share relating to sales is an expense "in connection with" the transfer. They lean on the Delhi High Court's description, in Kaushalya Devi, of a genuine expense with a proximate nexus to the transfer.

The Revenue argues it is neither: a charge for a continuing service, payable whether or not any share is traded, so not "wholly and exclusively" connected with any specific transfer.

From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. The Income Tax Department's explainer notes that the new Act has 536 sections, replaces "previous year" and "assessment year" with a single "tax year", and leaves tax years that began before 1 April 2026 under the old Act. The government confirmed the 1 April 2026 start date in the Budget 2026 announcements.

For PMS fees, the key point is continuity. Capital gains are now computed under Section 72 of the 2025 Act. Section 72(1)(a) still allows "expenditure incurred wholly and exclusively in connection with such transfer", Section 72(1)(b) still allows cost of acquisition and improvement, and Section 72(3) still bars securities transaction tax (STT) and interest claimed elsewhere. With the operative words unchanged, the Section 48 rulings are likely to remain the reference point, so the old split carries into the new law. We have not found any ruling yet that decides PMS fees under Section 72 itself.

Before you ask whether portfolio management fees reduce capital gains, you need to be sure the income is capital gains at all. Shares can be held as investments (capital assets) or as stock-in-trade (a trading business). The tax consequences are very different:

To reduce disputes, the CBDT issued Circular No. 6/2016 (29 February 2016). It says that for listed shares held for more than 12 months, if the taxpayer chooses to treat the gain as capital gains, the Assessing Officer will not dispute it; taxpayers can also have separate investment and trading portfolios, but whichever stand they take must be applied consistently in later years.

For most HNI investors, capital-gains treatment beats business treatment even without the fee deduction, because concessional rates beat slab rates. The business route matters mainly for entities whose activity is dealing in securities. It is also where the Revenue tends to fight: in Joy Beauty Care, the department's High Court appeal was admitted only on whether the income was business income or capital gains, not on the fee. The lesson is to settle the characterisation question first, with your adviser, and only then think about a pms fee deduction.

The clearest statement of the refusal view is ACIT v. Apurva Mahesh Shah, decided by the Mumbai 'A' Bench on 29 June 2018 for assessment year 2007-08. The taxpayer had claimed about ₹1.13 crore of portfolio management fees and performance-linked fees against short-term capital gains. The tribunal disallowed the entire claim. Its reasoning has four strands that the Revenue still relies on:

1. Nature of the service. The fees were paid for "making investments" and "managing the portfolio", which the tribunal described as a service charge, not an expense of transferring particular shares.
2. Payable without a transfer. The fee would be payable even in a period in which no share was bought or sold, which, in the tribunal's view, breaks the link with any specific transfer.
3. Not part of cost. The fee did not become part of the cost of acquisition or improvement of any share.
4. Form does not change substance. Calculating the fee on returns or transactions did not alter its character; the performance fee was treated the same way as the fixed fee.

Earlier Mumbai decisions reached similar conclusions. In Devendra Motilal Kothari, the decisive problem was that the taxpayer could not apportion the fees on a rational basis between purchases, sales and closing holdings. Mateen Pyarali Dholkia treated PMS charges as investment advisory fees outside Section 48 altogether. That is why many investor explainers simply say PMS fees "cannot be deducted": it is the department's position, with tribunal support.

The allowing line starts from KRA Holding & Trading. The Pune bench accepted that the fee was directly connected to the securities and their transfer, was genuinely incurred and at arm's length, and, crucially, that the taxpayer had allocated it on a reasonable basis (the fee was computed on the net asset value of the securities, and the portion relating to dividends was not claimed). Later benches built on this:

Vireet Investments adds a useful limit: the Delhi bench allowed PMS expenses directly tied to securities transactions but refused to let general overheads such as salaries and depreciation be set off against capital gains.

The most recent decision is Ameeta Jagdish Thackersey v. ITO (ITA No. 1685/Mum/2026, assessment year 2011-12), decided on 10 August 2026. The taxpayer had claimed ₹8,42,360 in PMS fees paid to Trust Investment Advisors. The Mumbai bench openly acknowledged the conflict, citing Apurva Mahesh Shah on one side and KRA Holding, Zarah Rafik Malik and Vireet Investment on the other. It noted that the Revenue had not produced any binding High Court or Supreme Court decision prohibiting the deduction.

Faced with "two reasonable and plausible interpretations" of Section 48, the tribunal applied the Supreme Court's rule in CIT v. Vegetable Products (1973): where a taxing provision admits of two reasonable constructions, the one that favours the taxpayer should be adopted. The deduction was allowed.

The ruling does not say the Mumbai refusal line was wrong; it says genuine conflict is itself a reason to allow the claim.

SEBI's own FAQ for portfolio managers says a portfolio manager may charge a fee "as per the agreement with the client", which may be a fixed amount, a performance-based fee or a combination of both, that no upfront fee can be charged, and that the agreement must set out the quantum and manner of every fee. Tax treatment follows what each charge is for:

A fixed management fee is the charge most exposed to the "payable even without a transfer" argument. The allowing benches answered with a reasoned split: the part relating to buying and selling securities is claimable, the part relating to dividends is not, and the part relating to unsold holdings is carried forward.

A performance fee is calculated on gains, which sounds easier to link to a transfer. Apurva Mahesh Shah rejected that directly: the basis of calculation does not change the nature of the service. And because the fee is usually computed on portfolio value, including unrealised gains, only part of it can be linked to shares actually sold; your hurdle and high water mark terms drive that allocation.

Brokerage is the uncontroversial part of pms charges: brokerage on purchase goes into cost, brokerage on sale is a transfer expense. Securities transaction tax, on the other hand, is expressly barred from the capital-gains computation by statute, and Section 72(3) of the new Act carries that bar forward. At least one 2026 investor guide we reviewed wrongly lists STT as deductible; it is not. GST at 18% on fees for resident investors is a real cost, and we found no ruling that treats it separately from the fee, so it stands or falls with the underlying charge.

The numbers below are illustrative only. They assume capital-gains treatment, an allocation your adviser will defend, and long-term gains well above the ₹1.25 lakh exemption, and they ignore surcharge and cess. The rates are those that have applied to transfers on or after 23 July 2024.

The setup

• Average portfolio value: ₹2 crore
• Fixed fee: 2% a year = ₹4,00,000, plus 18% GST of ₹72,000 = ₹4,72,000 paid
• Realised short-term gains during the year: ₹12 lakh; realised long-term gains: ₹20 lakh
• Allocation (say, based on the value of securities sold relative to the portfolio, after excluding the dividend share): 15% of the fee to short-term sales, 30% to long-term sales, 55% to holdings still unsold

The claim

A successful claim recovers roughly 6.7% of the fee paid that year. Under the allowing line's logic, the 55% allocated to unsold holdings would be argued as part of their cost when they are sold.

A strong year with a performance fee

Suppose the same portfolio also pays a performance fee of ₹10 lakh plus ₹1.8 lakh GST (₹11.8 lakh). Using the same 15% / 30% split, ₹1,77,000 goes against short-term gains (tax saved ₹35,400) and ₹3,54,000 against long-term gains (tax saved ₹44,250), a further ₹79,650.

The lesson: the deduction is worth having, but it is a fraction of the fee and never turns an expensive PMS into a cheap one. At this portfolio size the saving is in the tens of thousands a year, which the cost of an appeal can easily absorb; larger portfolios change that maths.

Knowing whether PMS fees deductible treatment is available to you pays off even if you never file a claim:

• Honest post-tax comparisons. If fees come out of post-tax money by default, you can compare a PMS with a mutual fund or a direct portfolio on equal terms.
• A defensible claim where it is worth it. For large fees and gains, a carefully allocated pms fee deduction backed by the Pune, Delhi, Kolkata and recent Mumbai rulings reduces tax at 20% or 12.5% on the allocated amount.
• No wasted claims. STT, dividend-related fees and general overheads are not claimable; knowing that avoids positions that will almost certainly fail.
• Cleaner characterisation. Choosing capital gains or business income up front, and sticking with it as Circular 6/2016 expects, avoids the more expensive fight.
• Better invoices. Asking your PMS for invoices that separate fixed fee, performance fee, GST and operating costs makes any allocation easier.

The deduction debate is ultimately about what you keep after the manager, the GST and the tax department have each taken their share. That is the number PMS Sahi Hai is built to put in front of you.

Nyra, PMS Sahi Hai's AI research analyst, describes itself as "the AI built for Indian wealth, grounded only in SEBI, AMC and IFSCA primary sources." Its Honest Mirror feature is designed to surface hidden fees and calculate post-tax drag, and its tax intelligence covers STCG, LTCG and tax-loss harvesting in rupees. Nyra cites the source behind every claim and is clear that it is "an analytical tool, not a SEBI Investment Adviser"; the final call on a deduction belongs with your chartered accountant. Here is how that helps:

• See the full fee load before you sign. The portfolio health check scores your existing PMS, AIF, mutual fund or equity holdings and shows "the full load: fixed, performance, and the hidden drag", alongside returns "net of everything". If fees are not deductible for you, that load comes out of post-tax money.
• Compare strategies on the same rubric. PMS Sahi Hai's comparison tool scores every SEBI-registered PMS, AIF and GIFT City fund on a consistent 0–10 scale, so a high-fee strategy has to earn its place against cheaper ones.
• Understand the tax that sits next to the fee. Our explainer on how PMS gains are taxed in your own hands covers the STCG/LTCG mechanics, and the guide to portfolio turnover shows how churn turns into tax and trading costs in your account.
• Know what we charge. PMS Sahi Hai charges investors no advisory fee and no upfront commission; it is paid a disclosed trail by the asset manager, which is part of the cost you are evaluating.

The point is not to promise a tax saving. It is to make sure that when you and your adviser decide whether to claim portfolio management fees, you already know how large they are and what they cost after tax.

If you and your adviser decide the claim is worth making, the rulings point to a clear set of practices.

The single biggest difference between the cases that failed and the ones that succeeded is allocation. Kothari lost because the fee could not be apportioned; KRA Holding won because it was. A defensible method usually:

1. Starts from the invoices: fixed fee, performance fee and GST shown separately for the year.
2. Excludes the portion that relates to dividend income (fees cannot be set off against dividends at all).
3. Splits the rest between securities bought, securities sold and holdings carried forward, on a stated basis such as transaction values relative to average portfolio value.
4. Further splits the "sold" portion between short-term and long-term gains, because they are taxed at different rates.
5. Treats general overheads (custody, audit, accounting) separately, and usually conservatively, in light of Vireet Investments.

• The PMS agreement and disclosure document showing the fee basis.
• Fee invoices with GST.
• The portfolio manager's annual capital-gains and transaction statements.
• A short working note explaining the allocation method and the rulings relied on.

In the return, the claim sits inside the capital-gains computation, as transfer expenditure or as part of cost against the gains it relates to, not as a separate deduction line. Because the position is contested, discuss with your adviser how to disclose the basis transparently so that, if it is disallowed, it is seen as a bona fide difference of legal opinion.

An honest view of the downside:

• The department's default position is "no". The Mumbai refusal line, including Apurva Mahesh Shah, gives Assessing Officers tribunal support for disallowing the claim. Expect to defend it on appeal.
• No higher court has settled it. Every ruling here is from the ITAT; none we reviewed cites a High Court or Supreme Court judgment deciding the point, and in August 2026 the Revenue could not point to one either.
• Slow resolution. The August 2026 ruling decided a 2011-12 assessment. Professional costs accumulate while you wait.
• No set-off against dividends. Since the Finance Act 2020, the only deduction allowed against dividend income has been interest, capped at 20% of the dividend. The Finance Bill 2026 memorandum proposed removing even that, so that from 1 April 2026 no interest deduction is allowed against dividends or mutual fund income, and the Finance Act 2026 received assent on 30 March 2026. PMS fees attributable to dividends are therefore simply a cost.
• Business-income trade-off. Business treatment secures the fee deduction but gives up concessional rates and the ₹1.25 lakh exemption, and the stand must then be applied consistently.
• Allocation can be attacked. An unreasoned "100% of the fee against STCG" claim invites disallowance even before benches that allow the deduction.
• New Act, untested. Section 72 uses the same words as Section 48, but no ruling we found has yet applied it to PMS fees.

After fifteen years of tribunal decisions, the most accurate answer to "are PMS fees deductible?" is: sometimes, if you can defend it, and never against dividends. The legal test, expenditure wholly and exclusively in connection with the transfer, plus cost of acquisition, has moved from Section 48 to Section 72 without changing a word. The Mumbai refusal line (Kothari, Apurva Mahesh Shah) and the allowing line (KRA Holding through to the August 2026 Thackersey ruling) both remain good law at tribunal level, and the most recent rulings we found (Delhi in 2024, Mumbai in August 2026) allowed a reasonably allocated claim, the latter on the Vegetable Products principle.

For most HNI investors that means three rules. Treat your PMS fee as a post-tax cost when choosing a strategy, so any deduction is a bonus rather than a plan. If fees and gains are large, ask your adviser whether a carefully allocated claim is worth the litigation risk. And keep the paperwork, because the claims that succeed have a clear allocation.

Whichever way you go, start from the real numbers. Tools like Nyra on PMS Sahi Hai make the full fee load and post-tax drag visible before you commit, which is the part of pms taxation you can control regardless of how the courts eventually settle the deduction question.

The deduction question will keep moving through the tribunals. What you can decide today is how much you pay and what it costs you after tax. Before you sign a PMS agreement, or before your next return, run your current holdings through the PMS Sahi Hai portfolio health check to see the full fixed, performance and hidden fee load, compare strategies on Nyra's consistent 0–10 scale, and read our breakdown of what you pay in PMS fees step by step.

If you want a person to walk through it with you, book a private consultation with the PMS Sahi Hai team, and take the answer to your chartered accountant, who should make the final call on any fee deduction in your return.