Frequent-churn PMS strategies face tax dilemma as budget hikes capital gains tax

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MUMBAI : Portfolio Management Services (PMS) are navigating new challenges after the Union Budget for 2024-25 increased capital gains tax rates. The budget raised the short-term capital gains (STCG) tax rate to 20% from 15%, impacting PMS investors who face higher taxes if a stock is sold within 12 months of purchase. This tax hike will significantly affect PMS strategies with high churn rates, where frequent trading doesn't yield post-tax returns that justify the increased activity.

Read this | Budget 2024: What changes in capital gains taxes mean for investors “Due to the higher tax rate on both short-term and long-term capital gains, portfolio management services (PMS) strategies with frequent buying and selling (high churn rate or portfolio turnover) will be at a disadvantage compared to mutual funds," explained Rohan Samant, principal officer and chief investment officer at Multi-Act PMS. “To remain competitive on a post-tax basis, PMS strategies will need to generate higher returns (alpha) than mutual funds to offset the additional tax liability from the investor’s perspective," Samant added. In contrast, mutual funds offer a more tax-efficient structure.

When a fund manager sells a stock, it doesn't immediately trigger a tax event for the investor. Instead, the gains are reflected in the fund's net asset value (NAV), and investors are only taxed on gains when they redeem their holdings. This differs from PMS, where stocks are held in the investor's demat account, leading to a tax impact with each sale.