New GST structure for TER could impact SEBI-regulated small MF distributors as new rules take effect April 1

The regulatory change in TER aimed at making mutual fund costs more transparent for investors could potentially alter how distributors earn commissions, with smaller players likely to face financial and operational impact. The changes in TER post the overhaul in Mutual Fund Regulation announced in December 2025 is set to come into effect from April 1.

The move is expected to improve cost visibility for investors by clearly distinguishing between fund management expenses and external levies, however, concerns have emerged over how the changes could affect mutual fund distributors. Industry bodies such as the Foundation of Independent Financial Associates (FIFA) have also reportedly raised concerns with the regulator about the framework, arguing that it may disproportionately affect smaller distributors and could warrant a review.

What will be the impact?

A key shift lies in how commissions will be paid. Under the current structure, payouts are effectively GST-inclusive. For example, on a 1% commission, a GST-registered distributor receives about 0.85% as base commission and 0.15% as GST, while an unregistered distributor receives the full 1%, effectively retaining the tax component.

From April 1, this structure will change. According to a KFintech note, commissions will be “de-grossed” and paid exclusive of GST. Using the same example, the 1% rate translates to a base commission of roughly 0.85%. A GST-registered distributor will continue to receive 0.85% plus GST, but an unregistered distributor will receive only the 0.85%, losing out on the earlier embedded tax portion. Distributors will have to remit GST to the government and provide proof to KFintech to receive the tax component of their commission.

“Obviously, there will be a negative impact on income for unregistered distributors. Earlier, they could keep the GST component with themselves, but no more. A reduction of 0.15% on income is considerable, and distributors will have to bring in additional business to offset it,” noted, founder of UPInvest, a mutual fund distributor.

The shift also changes how cash flows and compliance are managed. GST-registered distributors will need to charge GST separately, deposit it with the government, and then claim it through filings, with payouts linked to compliance. “Registered MFDs have to pay GST from their pocket before it is reimbursed. So they have to manage their cash flow accordingly,” he added.

Those outside the GST net may see a direct reduction in take-home income. This could see more distributors make a shift. “It does make sense now for more distributors to move towards GST registration to stay compliant and keep cash flows stable,” said co-founder of Wealthy.in, a platform that supports thousands of distributors in a note shared with Moneycontrol.

The impact, he says is expected to be uneven. India has over 2 lakh ARN holders, with more than 25,000 new entrants joining the industry each year. A significant portion operates below the Rs 20 lakh GST threshold. For these distributors, the change could lead to an income decline of around 15%, as the implicit GST component in commissions is removed.

Operational impact

At the same time, the operational burden is set to increase. Distributors often work with multiple asset management companies, and the revised framework requires tracking GST-related cash flows across each relationship, maintaining documentation, and ensuring timely compliance. For smaller firms with limited back-office capacity, this could prove challenging.

“Initially, it is going to be a tedious job for a majority of distributors. However, RTAs are stepping in for a smoother transition of both AMCs as well as MFDs into the new system,” he said. A distributor who did not want to be named added that the move could result in atleast a month of lag in the process of reimbursement of GST for the distributor. He added that currently, a lot of confusion remains on bill generation and operation but was hopeful this could settle down once more clarity is available.

The changes may also influence how distributors operate going forward. He added that technology-driven platforms could help ease the transition by taking on some of the operational workload, including reconciliation and reporting. He added, “No one likes their income to be impacted negatively. So, this will push smaller distributors towards GST registration or move towards larger platforms as they are more equipped to support with their systems and expertise.”

But not all see the option of moving towards distributor platforms as a positive noting that this could impact the “independence” for distributors, especially those that do not come under the purview of GST taxation.

What the regulation says

In December 2025, the Securities and Exchange Board of India (SEBI) approved a revamp of the Total Expense Ratio (TER) framework. SEBI Chair Tuhin Kanta Pandey, post the December 17 board meeting had noted that the regulator had consciously moderated its proposals on brokerage and mutual fund costs after extensive consultations, describing the final framework cleared by the board as “a balanced version” rather than a radical overhaul. The goal he noted was to provide transparency for investors. The revised rules, effective April 1, 2026, separate statutory charges such as Goods and Services Tax (GST), Securities Transaction Tax (STT) and stamp duty from the core expense ratio, requiring these to be disclosed independently. As a part of the overhaul, the regulator has also approved reductions in brokerage limits.

Source from: https://www.moneycontrol.com/news/business/markets/new-gst-structure-for-ter-could-impact-sebi-regulated-small-mf-distributors-as-new-rules-take-effect-april-1-13864424.html