GST Registration and TER Impact for Fund Distributors

If you hold an AMFI ARN and earn trail or upfront commission from AMCs, GST has been part of your compliance life since 2017. But April 1, 2026 changed the economics. SEBI's modified TER framework delinked GST from the Total Expense Ratio, and AMFI Circular 123/2025-26 extended this to existing AUM from May 2026. The result: AMCs now pay a GST-exclusive base commission (about 15.25% lower than the old GST-inclusive rate) and add 18% GST only for registered distributors who invoice them. Unregistered distributors, who used to keep the full GST-inclusive payout, take the cut.

This guide covers everything an MFD needs to know - the GST rate, when to register, how the TER delinking works in practice, what changes on your invoices, and how to file returns correctly.

Is MFD Commission Taxable Under GST?

Yes. Commission earned by mutual fund distributors for distributing mutual fund schemes is a taxable supply of services under Section 7 of the CGST Act, 2017.

This applies to both forms of commission:

• Trail commission - the ongoing fee paid monthly or quarterly as a percentage of the AUM you brought in.
• Upfront commission - the one-time fee paid on new investments or SIP registrations.

Both must appear on your tax invoice to the AMC and both attract GST at 18%.

An important clarification: services of a mutual fund agent or distributor to a mutual fund or AMC were under the reverse charge mechanism (RCM) for a period, with the AMC paying the GST. That entry was removed by Notification No. 29/2018-CT(Rate) dated 31 December 2018, with effect from 1 January 2019. Since then, the forward charge mechanism applies. The distributor (you) is liable to charge, collect, and remit GST. The AMC is not responsible for your GST.

GST Rate and SAC Code for MFD Commission

When you raise a tax invoice to an AMC registered in the same state as your GSTIN, you charge CGST 9% + SGST 9%. When the AMC's registered address is in a different state, you charge IGST 18%.

Most large AMCs are registered in Maharashtra (Mumbai). If your GSTIN is in Telangana, Karnataka, or any state other than Maharashtra, your invoices to these AMCs will carry IGST at 18%.

Registration Threshold: When to Register

Under Section 22 of the CGST Act, 2017, GST registration is mandatory once your aggregate turnover in a financial year exceeds:

Aggregate turnover includes all your PAN-linked taxable income, not just MFD commission. If you also earn insurance commission, financial planning fees, or any other service income, all of it counts toward the threshold.

When Should You Register Even Below the Threshold?

After April 1, 2026, registration below Rs 20 lakh is worth weighing, but be clear about what it does and does not recover:

1. AMCs pay the GST component only to registered distributors. That 18% is collected from the AMC and paid over to the government, so it does not raise your own net income. A registered and an unregistered distributor with the same book now net the same base commission; the cut of about 15.25% against the old GST-inclusive payout falls on unregistered distributors either way.
2. ITC recovery. This is the real financial gain. Once registered, you can claim Input Tax Credit on business expenses (rent, internet, software, travel), reducing your net GST outflow.
3. Professional credibility. Larger IFAs and sub-distributor networks increasingly require a GSTIN before onboarding partners.

The downside is the compliance cost: monthly or quarterly GSTR-1 and GSTR-3B filings, even in months with zero business. Nil returns are still mandatory.

SEBI TER Delinking: What Changed on April 1, 2026

This is the most significant change for MFDs in 2026. Understanding the before and after is critical.

Before April 1, 2026

• The Total Expense Ratio (TER) was a single all-inclusive number capping the expenses an AMC could charge to the scheme.
• GST on management fees and distributor commissions was embedded inside the TER.
• AMCs paid distributors a GST-inclusive commission. Whether you were registered or unregistered, you received the same gross amount from the AMC.
• The AMC absorbed the GST burden within the TER cap.

After April 1, 2026

• SEBI modified the TER framework to exclude GST from the TER computation. GST on management fees is now disclosed separately.
• Commission payouts from AMCs are now GST-exclusive (base commission only).
• AMCs pay 18% GST on top of base commission, but only to distributors who are GST-registered and submit a valid tax invoice with their GSTIN.
• Unregistered distributors receive only the base commission. No GST reimbursement.

Concrete Example

Consider an MFD earning Rs 1 lakh base commission per month from an AMC:

The unregistered MFD keeps Rs 1,00,000. The registered MFD receives Rs 1,18,000 gross and, after paying Rs 18,000 GST to the government, also retains Rs 1,00,000, but can set ITC on business expenses against that Rs 18,000.

The real change is against the old payout. Under the old framework, an unregistered distributor kept the full GST-inclusive commission (say Rs 1,18,000), while a registered one paid Rs 18,000 of it as GST. Under the new framework both net Rs 1,00,000, so the unregistered distributor's income falls by Rs 18,000, or about 15.25%.

AMFI Circular 123/2025-26

This circular operationalised SEBI's framework changes. Key points:

• Effective for all new inflows from April 1, 2026.
• Extended to existing AUM (trail commission on legacy book) from May 2026.
• AMCs must maintain two payment tracks: base commission to all distributors, and a separate GST reimbursement line item only for registered distributors with valid invoices.

Impact on Unregistered MFDs

If you are an unregistered MFD, here is the practical impact:

Your payout falls by about 15.25% compared with the old GST-inclusive commission. The math: where you used to receive Rs 118, you now receive the Rs 100 base. A registered distributor receives Rs 118 (Rs 100 + Rs 18 GST), pays Rs 18 to the government and also nets Rs 100. Registering does not win back the Rs 18; its only direct gain is ITC on business expenses, which an unregistered distributor cannot claim.

For an MFD with Rs 5 crore AUM whose old trail was 1% GST-inclusive (Rs 5 lakh per year), the new base payout is about Rs 4,23,729, a fall of about Rs 76,271. Registration does not reverse this; it only lets you offset ITC on expenses against the GST you collect.

Action step: If your MFD commission plus all other service income under the same PAN is approaching Rs 20 lakh, apply for GST registration before you cross it. With Aadhaar authentication, the officer must approve or raise a query within 7 working days. Below the threshold, register voluntarily only if your ITC on expenses is worth more than the cost of monthly or quarterly filing.

How to File GSTR-1 and GSTR-3B as an MFD

Once registered, you have two primary monthly obligations:

GSTR-1: Outward Supply Details

GSTR-1 is where you report all your commission invoices raised to AMCs during the month.

Due date: 11th of the following month for regular monthly filers.

GSTR-3B: Summary Return with Tax Payment

GSTR-3B is the summary return where you declare total outward supplies, claim ITC, and pay the net GST liability.

Due date: 20th of the following month for regular monthly filers.

QRMP Scheme Option

If your annual turnover is up to Rs 5 crore, you can opt into the Quarterly Return Monthly Payment (QRMP) scheme:

• File GSTR-1 quarterly instead of monthly (with optional Invoice Furnishing Facility or IFF for B2B invoices in the first two months of each quarter).
• File GSTR-3B quarterly.
• Pay GST monthly using the auto-generated PMT-06 challan (either the fixed sum method or the self-assessment method).

For most MFDs earning between Rs 20 lakh and Rs 2 crore, QRMP reduces the filing burden from 24 returns per year to 8.

ITC Claims for MFD Business Expenses

One of the biggest advantages of GST registration is the ability to claim Input Tax Credit on expenses directly related to your distribution business. Every rupee of ITC offsets your GST liability on commission income.

Common ITC-eligible expenses for MFDs:

Total potential ITC in this example: Rs 72,000 to Rs 75,600 per year.

Requirements for claiming ITC:

1. The expense must be for business purposes (used for making taxable supplies).
2. You must hold a valid tax invoice from the supplier.
3. The supplier must have reported the invoice in their GSTR-1 (reflected in your GSTR-2B).
4. The goods or services must have been received.

Blocked ITC (Section 17(5)): You cannot claim ITC on food and beverages (client dinners), health or life insurance (personal), club memberships, or motor vehicle expenses (unless the vehicle is used for taxable transportation of passengers or goods).

Income Tax on MFD Commission

GST and income tax are separate obligations. Here is how MFD commission is treated under income tax:

Classification

MFD commission is classified as "Income from Business or Profession" (not "Income from Other Sources"). This is because distribution is a business activity carried out in a regular and systematic manner.

TDS by AMC

AMCs deduct TDS on commission under Section 194H (now Section 393, payment code 1014 under the Income Tax Act 2025) at:

Note: Under Section 194H, TDS on commission is 2% (cut from 5% with effect from 1 October 2024), and applies once payments from an AMC exceed Rs 20,000 in the financial year (raised from Rs 15,000 from 1 April 2025). Verify the TDS for each AMC on your Form 26AS or AIS.

ITR Form

Presumptive taxation is not available. Section 44AD excludes a person earning income in the nature of commission or brokerage, and mutual fund distribution is not a specified profession under Section 44ADA. An MFD computes actual profit after expenses and files ITR 3. A tax audit under Section 44AB applies only if turnover crosses Rs 1 crore (Rs 10 crore where cash receipts and payments are each within 5%).

Common Mistakes MFDs Make

Step 1: Staying unregistered after crossing Rs 20 lakh.** The Rs 20 lakh limit is on aggregate turnover across all PAN-linked income, not just MFD commission. If you also earn LIC commission, financial advisory fees, or rent, all of it counts. Missing the threshold means retrospective liability plus interest at 18% per annum.

Step 2: Not issuing tax invoices to each AMC separately.** Each AMC requires a separate tax invoice for each commission payment or payout cycle. A single consolidated invoice across AMCs is not valid for GST purposes and will not be accepted for AMC reimbursement of GST under the new TER framework.

Step 3: Using the wrong SAC code.** MFD commission falls under SAC 997164, not 997159 (insurance auxiliary services) or 997157 (commission agent services for general trade). Using the wrong code can delay ITC claims for the AMC and trigger queries during assessment.

Step 4: Ignoring the GSTR-2B reconciliation.** Before filing GSTR-3B, always reconcile your ITC claims against the GSTR-2B auto-populated data. Under Section 16(2)(aa), ITC is allowed only on invoices reflected in GSTR-2B, and claiming more than GSTR-2B shows by a large margin triggers a DRC-01C intimation under Rule 88D. Act on invoices in IMS before GSTR-2B is finalised.

Step 5: Not maintaining separate books for GST and income tax.** Your GST turnover (commission invoices raised) and your income tax turnover (commission income received or accrued) may differ because of timing, GST-exclusive vs. GST-inclusive treatment, and the accrual vs. receipt basis. Reconcile quarterly to prevent mismatches that trigger notices.

Step 6: Filing ITR 1 instead of ITR 3.** MFD commission is business income, not salary. ITR 1 and ITR 4 do not fit non-presumptive business income, and filing the wrong form can draw a defective return notice under Section 139(9).

Step 7: Registering late after crossing the threshold.** Once aggregate turnover crosses Rs 20 lakh, you must apply within 30 days. Until registration, you cannot charge GST to the AMC, yet the tax on supplies above the threshold is still payable from your own pocket.

How Tax Garden Helps

Tax Garden's GST compliance plans cover the full MFD compliance cycle: GST registration application, monthly tax invoice generation for each AMC, GSTR-1 and GSTR-3B filing, ITC reconciliation against GSTR-2B, AMC commission statement matching, and quarterly GST-to-ITR turnover reconciliation. We handle distributors across all major AMCs and understand the commission structures, payout timelines, and the specific invoicing format each AMC expects. Talk to our team to get set up.

Sources

This guide is verified against Section 7 (scope of supply) and Section 22 (registration threshold) of the CGST Act, 2017; Notification No. 29/2018-CT(Rate) dated 31 December 2018 (withdrawal of reverse charge on MFD services from 1 January 2019); SAC code 997164 as listed under the GST rate schedule for financial services; SEBI circular on modified Total Expense Ratio framework effective April 1, 2026 (GST exclusion from TER); AMFI Circular 123/2025-26 (extension to existing AUM from May 2026); Section 16 of the CGST Act (conditions for ITC); Section 17(5) (blocked credits); Section 44AD and 44ADA of the Income Tax Act (presumptive taxation); Section 194H / Section 393 payment code 1014 (TDS on commission); GSTR-1 and GSTR-3B filing rules under the CGST Rules, 2017; and the QRMP scheme notification. Rates, thresholds, and SAC codes should be verified against cbic-gst.gov.in and the GST portal before applying to specific transactions.

Frequently Asked Questions

Can a mutual fund distributor use presumptive taxation under Section 44AD?

No. Section 44AD specifically excludes income in the nature of commission or brokerage, and distribution is not a specified profession under Section 44ADA. An MFD must compute actual profit after expenses and file ITR-3. A tax audit applies only if turnover crosses the Section 44AB limits.

At what rate do AMCs deduct TDS on distributor commission?

For FY 2025-26, commission is subject to TDS under Section 194H at 2% once payments from an AMC exceed Rs 20,000 in the year. The rate was cut from 5% to 2% from 1 October 2024. Check the TDS for each AMC in your AIS and Form 26AS before filing the ITR.

Can a mutual fund distributor opt for the GST composition scheme for services?

Only in limited cases. The 6% composition scheme under Section 10(2A) is for service providers with turnover up to Rs 50 lakh who make no inter-state outward supplies. Since most AMCs are registered in Maharashtra, a distributor in Telangana or another state invoicing them makes inter-state supplies and cannot use the scheme.

Is GST registration needed if my only income is MFD commission below Rs 20 lakh?

Registration is not compulsory below the Rs 20 lakh aggregate turnover threshold (Rs 10 lakh in Manipur, Mizoram, Nagaland and Tripura), counting all taxable services under your PAN. You can still register voluntarily, which lets you charge GST to AMCs and claim ITC on business expenses, but you must then file returns every period, including nil returns.

Which GST expenses can an MFD claim as input tax credit?

ITC is available on GST paid for business inputs such as office rent, internet and phone bills, software subscriptions, professional fees and office equipment, if the supplier reports the invoice and it appears in your GSTR-2B. Food and beverages, club memberships and most motor car costs are blocked under Section 17(5).