Can PMS management fees be claimed as a deduction against interest, dividend or capital gains income?

Investing through a Portfolio Management Services (PMS) scheme comes with professional expertise and portfolio management charges, which may include a fixed management fee and a performance-linked fee.

However, when it comes to filing income tax returns, investors often wonder whether these charges can be claimed as deductions against interest, dividend or capital gains income. Can PMS fees reduce your overall tax liability, or are they treated differently under the Income Tax Act?

Today's Q&A explains such details in response to a query by a reader

Under the PMS the investments are held in the name of the person owning the portfolio.

As regards clam of PMS charges against interest income is concerned, the same can not be claimed against the interest income from investments of the portfolio. At the most you can claim interest paid for money borrowed to make the investments or collection charges linked with the interest income.

As regards claim against dividend income is concerned, the law clearly provides that deduction only in respect interest against dividend income and that too only upto 20% of the dividend income. Here also collection charges can be claimed.

In my opinion, you can claim the PMS charges against interest/dividend income if you are disclosing the income from PMS as business income.

As far as deduction under the head capital gains is concerned only the cost of acquisition and expenses necessary for transfer of the assets like brokerage can be claimed against the sale price of the investment. There is no provision under the law for deduction for any management charges paid for management of the portfolio and hence in my opinion the same cannot allowed even while computing the capital gains.

In case the investments were made with borrowed money the interest cost can be added to the cost of investment. The charges paid to PMS cannot be added to the cost of the investments. PMS charges can be claimed as business expenditure if you are offering your income from such PMS under the business head. The practice of offering such income under the business head has to be followed consistently year after year.

In Mateen Pyarali Dholkia v. DCIT the Mumbai Tribunal has held that PMS fees are not deductible because they were not the cost of acquisition or improvement, nor expenditure wholly and exclusively connected with the transfer.