The principle that changes per route: who is taxed
The single thing that separates these three routes is who the law treats as having earned the income — you, or the fund. Fix that, and the rest of the treatment follows.
| Route | Who is taxed | When |
|---|---|---|
| PMS | You (look-through) | As each trade happens in your account |
| AIF Cat I / II | You (pass-through, Section 115UB) | In the year the fund earns the income |
| AIF Cat III | The fund, generally | At the fund level; you get net income |
A PMS holds securities in your own name and trades on your behalf, so for tax it's as if you made every trade — there's no separate fund layer. AIFs are pooled funds, and the category decides whether the pool is transparent (Category I and II pass income through to you) or taxed itself (Category III, generally taxed at the fund level). GIFT City is a location-based concessional regime layered on top, with its own exemptions, covered in its own section below.
Keep this who-is-taxed question in front of you for each route; it's the lens for everything that follows.
PMS: every trade is your own
In a Portfolio Management Service, the manager buys and sells securities that are held in your name, in your demat and bank accounts. There is no fund entity sitting between you and the securities, so for tax there is nothing to pass through — each transaction is simply your transaction.
The consequence is that every buy and sell the manager makes is a taxable event for you, exactly as if you'd placed the trade yourself. A discretionary PMS can churn the portfolio actively, which means a busy year can throw off a large number of short-term and long-term capital-gains events, each to be picked up on your return. Listed-equity gains follow the standard rates — long-term at 12.5% over the ₹1.25 lakh exemption (Section 112A), short-term at 20% (Section 111A).
For an NRI the practical work is reconciling the PMS's capital-gains statement against your AIS and the TDS deducted, and making sure the short-term/long-term split and the grandfathering on older holdings are right. The PMS gives you a statement; the return has to match it and the department's records both.
AIFs: the category decides everything
Alternative Investment Funds are pooled vehicles, and how you're taxed turns entirely on which SEBI category the fund is.
Category I and Category II AIFs are pass-through under Section 115UB. The income the fund earns (other than its business income, which is taxed at the fund level) is treated as if you, the investor, earned it directly — in the same character (capital gains stay capital gains, interest stays interest) and in the year the fund earns it, whether or not it's distributed to you yet. The fund issues you a statement of your share, and it flows onto your return; the fund typically deducts TDS on the income credited to you.
Category III AIFs don't get that pass-through. They are generally taxed at the fund level, so the fund pays tax on its income and what reaches you is income already taxed there. The reporting on your side is correspondingly different.
So the first question with any AIF income is always: which category? A Category II credit you ignore as 'already taxed' could be income you actually owe tax on under Section 115UB — and vice versa for Category III.
GIFT City IFSC: a concessional regime of its own
GIFT City — India's International Financial Services Centre (IFSC) — is a distinct, location-based regime built to attract non-resident money, and it carries its own set of concessions rather than the ordinary domestic treatment.
For NRIs the attraction is that certain income routed through IFSC units enjoys exemptions or reduced rates that wouldn't apply onshore — for instance, favourable treatment of certain income for non-residents investing through IFSC funds, and concessions on specific IFSC products. Because the rules are product-specific and have moved over recent budgets, the detail belongs in one place rather than a paragraph here. We keep it in the dedicated guide, [the GIFT City IFSC FCY-FD and NRI tax guide](/learn/gift-city-ifsc-fcy-fd-nri-tax-guide), which walks through the routes, the FCY fixed-deposit angle and what's genuinely concessional versus what's marketed as such.
The one thing worth holding here: GIFT City is not a blanket tax-free zone. The concessions are specific, conditional, and worth confirming against your actual product before you assume them — which is exactly what the guide, and a scoping call, are for.
A worked example: Sanjay's three managed routes
Sanjay is an NRI in the UK who has spread money across three managed routes and gets a different kind of statement from each.
His PMS account traded actively through the year. Because the securities are in his own name, every trade is his — the year's statement shows a mix of short-term gains taxed at 20% (Section 111A) and long-term gains taxed at 12.5% above the ₹1.25 lakh exemption (Section 112A), and he reconciles all of it against his AIS.
His Category II AIF sends him a Section 115UB statement of his share of the fund's income for the year — capital gains keep their character and are taxed in his hands even though little was distributed, with the fund's TDS credited on his return. A separate Category III AIF he holds is taxed at the fund level, so what reaches him is net of tax there and is reported differently. He's also exploring a GIFT City IFSC fund; rather than assume the concessions, he checks the specific product against the linked guide first. The figures vary year to year, but the routing — PMS to him, Cat I/II pass-through to him, Cat III at the fund, GIFT City on its own terms — is the part that decides the return.