Ask PMS for quarterly audited statement of transactions in your account

This will make it easier for you to calculate your tax liability and pay it on time

When investing in a portfolio management service (PMS), don’t just look at the returns and performance of its schemes. Make sure that the PMS provider also gives out quarterly audited (or even unaudited/provisional)  statements of the transactions in your account, to help you pay the right amount of tax and on time.

Helping a client prepare her income tax return turned out to be more time-consuming than Kolkata-based investment advisor Malhar Majumder had expected it to be. Majumder had to go back and forth with his client’s PMS provider to get details of transactions and audited reports.

The taxation of PMS is similar to that of an individual buying and selling shares. But as the broker trades on behalf of the client in PMS, it needs to provide details of each transaction. “The client had invested in PMS from one of the country’s biggest brokers. But it was still a hassle getting the required information. At first, the client’s PMS operator didn’t send the audited statement. When they sent it a few weeks later, the report didn’t have the buying and selling price,” says Majumder.

Also, after the introduction of long-term capital gains (LTCG) tax this year, some investors will now need to start paying quarterly advance tax once their portfolio gains cross Rs 100,000. If you don’t pay advance tax, you will have to pay interest on the outstanding tax. If your PMS doesn't give out quarterly audited reports, you will need to hire a chartered accountant to prepare it, paying from your own pocket. In such a scenario, it's better to shift to a PMS with better processes than sticking with your existing one.

Watch out for advance tax

• With long-term capital gains tax on equity, there are higher chances of the gains in PMS attracting advance tax
   
• Ensure that the PMS sends quarterly reports highlighting the taxation of each transaction
   
• If it doesn’t, calculating taxes will be time consuming, cumbersome, and expensive for you

Investment advisors point out that many PMS providers don’t voluntarily send audited statements to the clients unless asked. Only a few PMS send an annual audited report mentioning the taxation for each transaction.

In the absence of an audited report detailing taxation, it entirely becomes the client’s liability to track each transaction. “If the PMS doesn’t send the report in the specific format needed for tax filing, the individual will need to segregate each transaction and check the taxation it will attract,” says Arvind Rao, founder of Arvind Rao & Associates.

It means the client or his chartered accountant will need to go through each contract note, note the details, calculate the gains or losses, and then evaluate the taxation it will attract. There could be times clients have not received contract notes and other documents related to the transaction, which can make the exercise cumbersome. “The PMS must give the audited account and profit and loss statement and unaudited or provisional statement every quarter. When an individual gives money to a fund manager, it’s the PMS’ responsibility to carry out the administrative work, and this is part of the fee it charges,” says Majumder. 

There are two forms of PMS in the country – discretionary and non-discretionary. In the more popular form – discretionary – the portfolio manager individually and independently manages the funds of each client in accordance with her needs. In the non-discretionary portfolio, clients give the directions to the fund manager. Investment advisors and chartered accountants say that in both the cases, the PMS has to comply with the administrative work.

Earlier, long-term capital gains didn’t attract tax. An investor had to only look out for short-term capital gains or losses. Now, with the introduction of long-term capital gains tax on equities, there are more chances that investors will need to pay advance tax once the gains cross Rs 100,000 threshold. If an investor fails to pay advance tax, he will need to pay interest on the outstanding tax at 1 per cent simple interest for every month of delay. If he fails to pay 90 per cent of the tax that he is liable for by March 15, there’s another 1 per cent penalty from April.