Yes, you read it right. There will be a GST on mutual fund exit load. The recent FAQ issued by Central Board of Indirect Taxes and Customs has clarified that there will be GST on mutual fund exit load at the time of redemption. Let’s have a look at how this will be applied to you as a mutual fund investor.
Impact on mutual fund investors
To understand the impact on the investor, first, let’s understand what is exit load. The exit load is the charge levied by the fund house on the redemption of the units before certain time frame from the date of commencement of the purchase by the investor. For example, If I have purchased any fund on 1st January 2018, where the exit load is 1% if I withdraw units before 1 year. Now, If I want to withdraw units on 1st June 2018, there will be 1% of exit load on my scheme NAV. so simply 1% will be deducted while counting the NAV at the time of redemption.
Such charges are levied by the AMCs to stop early withdrawal by the investors. These charges are over and above the base TER (total expense ratio) of the fund. These charges are only applicable if you are withdrawing your units before predefined time frame. (usually 1 year).
As you are aware that the expenses incurred by the asset management companies are factored in the NAV price of the fund scheme. Such charges are not factored in the NAV as the occurrence of the same is depend on the investor’s behavior.
In the recent FAQ, it is clarified that the exit load will attract GST @ 18%. However, the load will not burden the investor as the GST is included in the existing load levy. The AMC will lose out as the exit load amount credited back to the scheme will now be net off to the GST amount.
The GST authority believes that the exit load is considered as a “charges” and not as a service. Hence any charges collected from the investor are liable to pay GST amount. Hence, going forward there will a GST on exit load of all the mutual fund schemes, however it will be included in the load itself. This will not burden an investor who is withdrawing units before its predefined time frame.
So as an investor you don’t have to worry as this move will not impact your wallet as of now.
But we will have to see how the fund houses are adjusting this additional cost levied by the government.