Are Portfolio Management Fees Tax Deductible?
Many buyers, excessive net-worth people specifically, put money into the inventory markets or debt markets by way of portfolio administration providers (PMS). The goal of investing by way of a PMS is to reap the benefits of the experience of the portfolio supervisor and get a greater charge of return on the portfolio. All portfolio managers cost a flat price as a proportion of the worth of the portfolio (typically at the very least 1%), whereas some additionally cost an incentive price linked to the speed of return that an investor will get. To illustrate, the inducement price could also be 20% of the income made by the investor, exceeding an 8% every year return. For an investor who has invested ₹50 lakh in a PMS, the portfolio administration price (PM price) could be at the very least ₹50,000 every year, a sizeable quantity as compared with the return on the portfolio.
Are such PM charges tax deductible for the investor? The deductibility would depend on the composition of the portfolio, and the kind of earnings that the portfolio yields. If the earnings is taxable underneath the top “earnings from different sources”, any expenditure incurred wholly and completely for incomes such earnings could be tax deductible. The exception to that is within the case of earnings by the use of dividends and earnings from items of mutual funds (MFs), the place solely curiosity expenditure is deductible, and that, too, restricted to solely 20% of such earnings.
In the case of a debt portfolio, the earnings would usually be within the type of curiosity. Since the PM charges are earned wholly and completely for incomes such curiosity, the charges could be deductible. However, if a part of the curiosity is tax-free, solely PM charges attributable to the taxable curiosity earnings could be tax deductible.
The downside arises within the case of an fairness or MF portfolio. In such portfolios, the earnings could be by the use of dividends or earnings from MFs, short-term capital beneficial properties (STCG) and long-term capital beneficial properties (LTCG). Till 2019-20, dividends and earnings from MFs had been exempt from tax, as was LTCG until March 2018. All such earnings is, nevertheless, taxable since 2020-21. Therefore, all the earnings from such fairness or MF portfolio could be taxable.
The downside, nevertheless, is that the regulation now gives that no expenditure apart from curiosity may be claimed as a deduction in opposition to dividends or earnings from MFs. Therefore, PM charges, although immediately associated to the incomes of such earnings, can’t be deducted for tax functions from such earnings.
Can the PM charges be claimed as a deduction in opposition to STCG or LTCG? The regulation gives that in computing STCG/LTCG, deduction may be claimed just for bills in reference to switch, value of acquisition and price of enchancment. Can such PM charges be handled both as a part of value of acquisition or as bills in reference to switch?
Quite a couple of selections of the Income Tax Appellate Tribunal have held that proportionate PM charges are deductible in computing the capital beneficial properties. However, fairly a couple of tribunal selections have additionally taken a opposite view, holding that such charges usually are not deductible in computing the capital beneficial properties. The subject of deductibility of such charges from capital beneficial properties is, subsequently, a extremely debatable one, prone to result in litigation if one had been to assert such a deduction.
In all equity to taxpayers, such PM charges ought to definitely be allowed a tax deduction, because the investor’s return is basically web of PM charges. There is in substance a diversion of a lot of the investor’s earnings to the portfolio supervisor, as is attributable to the PM charges, even earlier than it’s earned by the investor (the truth is, even earlier than the cash is invested). It is, in a way, a diversion of earnings by overriding title from the investor to the portfolio supervisor. The portfolio supervisor additionally pays tax on such earnings, that too on the full charge of tax.
In the case of mutual funds, what’s taxed because the investor’s earnings is barely the quantity obtained after deduction of the MF administration charges. Why ought to a PMS investor endure, merely as a result of he/she has chosen to take the PMS route quite than the MF route, so as to maximize the return on his/her investments? Besides, an investor who makes use of the PMS path to put money into debt, as a substitute of fairness, can get a deduction for the PM charges paid by him/her. One fails to grasp the reasoning for such discrimination in opposition to an fairness or MF investor, by not permitting him/her the same deduction.
It is such synthetic tax disallowances that trigger a lot heartburn amongst taxpayers. There isn’t any logic behind disallowing such real expenditure, equivalent to PM charges, whereas computing the investor’s taxable earnings.
Taxpayers should be taxed on their actual taxable incomes, and never on their artificially inflated taxable incomes. It is excessive time that it’s clarified by the federal government that PM charges are deductible in computing the capital beneficial properties, if not allowed as a deduction in computing earnings from different sources.
Gautam Nayak is accomplice, CNK and Associates LLP.
Subscribe to Mint Newsletters * Enter a sound e-mail * Thank you for subscribing to our e-newsletter.
Never miss a narrative! Stay linked and knowledgeable with Mint.
Download
our App Now!!
