PMS is too tax-inefficient, or is it?

"PMS is too tax-inefficient" is the number one objection we hear. It is also the most lazily repeated claim in Indian finance.

Every cocktail party conversation about PMS eventually arrives at the same moment. Someone — usually someone who has never actually run the numbers — declares with absolute conviction: “But PMS is terribly tax-inefficient compared to mutual funds.” The table nods sagely, because nobody knows better. The conversation moves on. And a genuinely important nuance gets buried under a comfortable cliché.

Here is what frustrates us: the claim is not wrong. It is just incomplete to the point of being misleading.

PMS taxation is not structurally worse than mutual fund taxation. It is conditionally worse, and the conditions depend almost entirely on how the PMS is managed. The tax gap between a well-managed PMS and a direct mutual fund is not the 2–3% chasm that everyone quotes. It is closer to 0.3–0.8% — and in some scenarios, the PMS actually has a tax advantage.

The Structural Difference: What Is Actually Different?

In a mutual fund, internal transactions do not trigger a tax event for you. You pay capital gains tax only on redemption. In a PMS, every sale triggers a capital gains event in your demat account. This is the structural difference. But its actual impact depends on one variable: how often the PMS manager trades.

The Tax Rates Are the Same. The Turnover Is Not.

The rates are identical. What differs is when and how often gains are realised. A mutual fund can churn at 200% turnover, and you pay zero tax until redemption. A PMS with the same turnover creates taxable events every time a stock is sold.

 The Two Worlds of PMS Turnover

PMS B — with disciplined turnover management — delivers a lower tax drag than the headline comparison suggests. And this is before tax-loss harvesting.

Tax-Loss Harvesting: The PMS Advantage Nobody Mentions

In a mutual fund, you cannot selectively realise losses on individual stocks. In a PMS, your portfolio manager can sell loss-making positions, book the tax loss, and immediately repurchase equivalents. Studies show systematic TLH adds 0.5–1.5% annually in after-tax return improvement. In India’s volatile markets, the opportunities are arguably even larger.

The Corrected Tax Drag Spectrum

The right question is not “Is PMS tax-inefficient?” It is “Is this specific PMS tax-inefficient?” And the answer depends on turnover, holding periods, tax-loss harvesting, and the manager’s explicit focus on post-tax outcomes.

Your PMS should not cost you more in taxes than it saves you in alpha. If it does, the problem is not PMS. The problem is your PMS.

Disclaimer: This article is for informational and educational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. Past performance of any strategy, including quantitative strategies, is not indicative of future results. All investments carry risk, including the risk of loss of principal. Tax implications discussed are based on prevailing tax laws as of FY 2025-26 and are subject to change. Investors are advised to consult their tax and financial advisor for personalised advice. Grey Sky Capital Private Limited is a SEBI-registered Portfolio Manager (Registration No. INP000009694). The views expressed are personal opinions of the author and do not necessarily represent the views of Grey Sky Capital.

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