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 IFSC) is a location-based regime with its own concessions for non-resident money. Certain income routed through IFSC units enjoys exemptions or reduced rates that don't apply onshore — but the rules are product-specific and have moved across recent budgets. The full detail is in the GIFT City IFSC FCY-FD and NRI tax guide.
GIFT City is not a blanket tax-free zone. The concessions are specific and conditional — confirm them against your actual product before assuming them.
PMS TDS for an NRI: how the provider withholds, and what you reconcile
Because a PMS trades in your own name, the provider doesn't just send a statement — for an NRI it also deducts tax at source on the gains, since a payment of taxable income to a non-resident attracts TDS under Section 195. So your year-end PMS statement has two figures you care about: the capital gains, and the tax already withheld on them.
The withholding broadly tracks the gain rates:
| Gain in the PMS | TDS the provider withholds |
|---|---|
| Listed-equity long-term | 12.5% over the ₹1.25 lakh exemption (Section 112A) |
| Listed-equity short-term | 20% (Section 111A) |
| Other gains | At the rate in force for that gain |
Two things follow for an NRI. First, the TDS is often deducted at the full Indian rate, trade by trade, without your treaty rate applied — so where a DTAA gives you a lower rate, the extra comes back on the return once you file with a Tax Residency Certificate and Form 10F (Form 41 from FY 2026-27). Second, the statement, your AIS and Form 26AS all have to agree: the gains you report and the TDS you claim must reconcile to what the provider deducted, or the credit is queried. The work is matching three records, not just copying one.
AIF TDS and reporting: what changes between Cat I/II and Cat III
The category that decides who is taxed also decides how TDS works and what you actually report.
For a Category I or II AIF, the fund deducts TDS on the income it credits to you under Section 194LBB — 10% for a resident, but for an NRI at the rate in force for that income, which can be higher unless your treaty rate is applied with a Tax Residency Certificate and Form 10F. You then report your share of the fund's income in its own character (capital gains as capital gains, interest as interest) under the Section 115UB pass-through, and claim that TDS on your return.
For a Category III AIF, Section 194LBB doesn't apply, because the income isn't passing through to you — the fund is generally taxed itself, often at the maximum marginal rate. What reaches you is net of the fund's tax, so there is usually no pass-through TDS credit for you to claim and the income is reported differently.
| Cat I / II AIF | Cat III AIF | |
|---|---|---|
| Taxed in your hands? | Yes (Section 115UB) | No — at the fund |
| TDS to you | Section 194LBB | Not under 194LBB |
| You report | Your share, by character | Net income received |
So before reporting any AIF credit, confirm the category — it changes both the TDS you can claim and the line the income goes on.
Why a GIFT City fund can mean a lighter Indian tax footprint
The concessions rest on specific statutory exemptions. Income of a non-resident from a specified IFSC fund is exempt under Section 10(4D), covering capital gains on qualifying IFSC securities regardless of holding period. A Category III AIF in GIFT City composed only of non-resident investors gets a separate exemption under Section 10(23FBC).
Two cautions: the exemptions are tied to the specific fund and security — not everything in GIFT City qualifies — so confirm against your actual product. An Indian exemption is also not worldwide: your country of residence can still tax the same income. The guide at /learn/gift-city-ifsc-fcy-fd-nri-tax-guide sets out which products genuinely qualify.
Getting the money out: repatriation and reporting
Repatriation runs through your NRI bank accounts. Proceeds in an NRO account are repatriable up to USD 1 million per financial year; NRE/FCNR balances move out freely. To remit from the NRO above ₹5 lakh in a year you file Form 15CA (Form 145 from FY 2026-27), with a CA certificate in Form 15CB (Form 146 from FY 2026-27) confirming the tax position on what's going out.
Reporting of gains happens on your Indian return for the year they arise, reconciled to fund statements and your AIS. Schedule FA — the foreign-asset disclosure — does not apply: PMS, AIF and IFSC holdings are Indian assets. Schedule FA applies only when you're ROR and only for assets held outside India.
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.