How GST Impacts Your Mutual Fund Investments in India?

The investment world is dynamic and constantly shaped by regulatory changes—Goods and Services Tax (GST) being a major one. This article explores the impact of GST on mutual fund investments. 

Introduction to GST

GST is an indirect tax levied on the supply of goods and services. It was introduced in July 2017 to replace various indirect taxes such as Value Added Tax (VAT), service tax, and excise duty.

GST is categorised into three types:

• Central GST (CGST): Levied by the central government 
• State GST (SGST): Levied by the state government 
• Integrated GST: Levied on inter-state transactions

GST rates are broadly divided into five main slabs: 

• 0%: Basic food grains, cereals, fresh vegetables, etc. 
• 5%: Essential goods such as oil, tea, spices, etc. 
• 12%: Certain garments, processed food items 
• 18%: Electronics, financial services including those related to mutual funds 
• 28%: Luxury items 

Additional Read: GST Registration - What is GST Registration & its Types 

Understanding GST for mutual funds

GST has no direct effect on investors. It does not apply to the investment you make or redeem. However, it does apply to various service charges involved in managing the fund. 

GST applicability across different mutual fund charges

1. GST on expense ratio and fund management fees

The Total Expense Ratio (TER), commonly known as the expense ratio, refers to the fees charged by the Asset Management Company (AMC) for managing and operating the scheme. It includes components such as fund management fees, administrative costs, distribution expenses, marketing charges, etc. 

An 18% GST is levied on specific components of the TER, including the fund management fee. This TER is deducted from the fund’s Net Asset Value (NAV), ultimately affecting investor returns. 

2. GST on distributor commissions 

There are two ways of investing in mutual funds—direct and regular. In the case of direct plans, you bypass intermediaries and transact directly with the AMC. With regular plans, however, you invest through intermediaries such as mutual fund distributors or bank relationship managers. Due to this involvement, which leads to commission charges, the TER of regular plans is higher. These commissions, too, attract 18% GST.

However, it must be noted that distributors earning less than ₹20 lakh annually are exempt from paying GST.

3. GST on exit loads and transaction charges

Exit load is a fee charged by AMCs when investors redeem their units before a specified period. This is done to discourage premature withdrawals. Initially, industry experts argued that exit load is not a payment for any service rendered and, hence, must not attract GST.  However, the Central Board of Indirect Taxes and Customs (CBIC) clarified in 2018 that exit loads will be subject to 18% GST.  

Similarly, transaction charges also attract 18% GST. These are one-time fees applied when the investment amount exceeds a specified threshold.  

4. GST impact on investment returns

As noted earlier, GST is not levied directly on investment returns. However, the GST paid by the fund house on various service-related charges is included in the TER. Since the TER is deducted from the fund's NAV, the per-unit value of your investment is reduced. 

Say the TER, including the 18% GST on fund management fees, is 1.18%. If a fund generates gross returns of 12%, the net returns would drop to 10.82%. While the difference may seem small, the compounding effect over a long investment horizon can significantly impact overall returns.  

5. GST impact on Systematic Investment Plans (SIP) and lump sum investments

Both lump sum investments and SIPs are subject to 18% GST on applicable service charges, such as fund management and transaction fees. However, since SIPs involve recurring investments, they may also incur additional transaction-related GST over time.

Taxation vs GST: What's the difference for investors?

Income tax is a direct tax levied on the income of an individual. GST is an indirect tax levied on the goods and services that individuals consume. 

In the case of mutual funds, income tax is applicable on: 

1. Dividends: These are taxed as per your income tax slab. 
2. Capital gains: The rates depend on the type of fund and the holding period in some cases

In contrast, GST is levied at 18% on service-related costs and is included in the TER. 

Is GST a burden or just a cost of service?

GST is not an entirely new charge. It simply replaced the earlier service tax. However, the current GST rate of 18% is 3% higher than the former 15% service tax. 

While GST is a tax on services and not an additional fee charged to investors, it does raise the overall cost of investing. These costs are included in the TER, which in turn affects your investment returns, especially in the long run due to compounding effects. 

That said, you can take smart steps to minimise GST-related impact, such as choosing direct plans or staying invested beyond the exit load period. 

In short, GST is a cost of service that can be managed well with thoughtfully planned investments. 

Conclusion

The introduction of GST in mutual funds has no direct impact on investment returns. However, it does increase the operating costs of managing a fund, which are reflected in the NAV. Being aware of how GST applies across various components helps you make better investment decisions and optimise your long-term returns. 

Additional Read: List of Documents Required for GST Registration in India