A regulatory overhaul of how commissions are paid will shake up the segment estimated to account for about half of India’s ₹81 trillion in mutual fund assets: small distributors. Industry experts say they will be forced to partner with larger peers to survive, driving consolidation.
The Securities and Exchange Board of India (Sebi) in December approved a revised framework for total expense ratio (TER) limits. It has two components: the base expense ratio (BER) and all statutory and regulatory levies, such as goods and services tax (GST), securities transaction tax, stamp duty, and regulatory fees, which will be charged separately over and above the base cost.
For equity-oriented schemes, BER will now range from 2.10% for assets up to ₹500 crore to 0.95% for assets more than ₹50,000 crore. It comes into effect from April 1.
With GST moving outside BER, compliance under the indirect tax regime will increase. Small distributors not registered for GST will be forced to partner with platforms that can help fulfil compliance requirements.
The move marks a fundamental change for the industry as about 90% of the distributors, who contribute about 40-50% of the mutual fund industry's assets under management (AUM) worth ₹81 trillion, are likely to be non-GST compliant, according to Parth Parekh, head of investor relations and senior research analyst at Prudent Corporate Advisory Services Ltd, which handles assets of ₹1.3 trillion.
There were about 178,000 mutual fund distributors in India as of fiscal 2025, according to the Association of Mutual Funds in India (Amfi). The top three distributors by commissions and expenses paid were NJ India Invest, State Bank of India and HDFC Bank.
“A majority of the industry is not GST registered as of now," said Kartik Sankaran, a mutual fund distributor with Happyness Factory, which handles assets of more ₹4,800 crore.
“There is a very long tail of distributors who do very few transactions in a year,” he said. “A small distributor who works with 15 AMCs will have to file 15 GST returns. Platforms can help them with this as they may not have the operational capacity or capital to do the same.”
A distributor working for a platform only needs to file one GST bill with the company, which then reaches out to the AMCs the distributor would have worked with to obtain the GST return.
“The shift to platforms will be a gradual move and may not start immediately after April 1. Platforms will also benefit as they will acquire more AUM. How big the shift will be is yet to be seen,” said Sankaran.
New system
A process note issued on February 26 by the registrar and transfer agent (RTA), KFin Technologies Ltd, outlines how the transition will work. Asset management companies will provide revised brokerage structures marked “exclusive of GST” starting 1 April.
Under the new system, commissions will be calculated on these base rates. However, the brokerage paid to distributors will initially exclude GST. The tax component will be tracked separately and released only after distributors remit the tax and submit proof through the RTA portal.
The change alters incentives across the distribution chain. Historically, many smaller distributors were not registered under GST but still received commissions that implicitly included the tax component. With commissions paid net of the tax, those distributors may effectively see lower payouts unless they become compliant.
For instance, if an asset management company pays 100 basis points (bps) in commission, inclusive of GST, that amount includes the base payout and the tax component. Since GST on distribution services is 18%, the embedded tax would be about 15.25 basis points (bps), leaving a base commission of roughly 84.75 bps.
Under the new system, AMCs will initially pay only the base commission. The GST portion will be released separately once distributors registered under GST file their returns and submit proof through the RTA system, while those who are not registered will receive only the base payout.
This also changes the economics between GST-registered and non-registered distributors. Those who are not registered will receive only the base payout of about 84.75 bps in the example cited above, creating an effective gap of roughly 15% in earnings compared with GST-compliant distributors.
“There will be a huge consolidation of smaller distributors into platforms. Earlier, non-GST registered distributors would get a 15% arbitrage compared to those who are registered; now this has reversed,” said Parekh.
Mutual fund distribution services attract an 18% GST, the standard rate applied to commissions earned by distributors. Small distributors with an annual turnover of up to ₹50 lakh can opt for the GST composition scheme, under which they pay a lower 6% tax on turnover but cannot issue GST tax invoices or claim input tax credit.
Distributors with an annual turnover below ₹20 lakh are not required to register for GST and do not charge the levy.