Mutual Funds Co. Facing GST tax Demand on Exit Loads

Mutual Funds companies are Facing Goods and Services Tax Demand on Exit Loads

Despite the GST dept  issue the clarification in 2018 stipulating that Goods and Services Tax must be levied at 18 percent on exit loads, many Company have not complied with this directive, Central Board of Indirect Taxes and Customs stated in 2018 that Goods and Services Tax applies to exit loads in mutual funds. The industry argues that these fees aren’t for services but to deter early exits

• “Exit Load: Charged if you redeem or switch before the scheme’s lock-in period (usually 1 year for equity funds).  GST @18% applies on exit load (as clarified by CBIC in 2018). Example: If exit load = INR 1,000, GST = INR 180, total cost = INR 1,180.”

• Switching = Redemption + Fresh Investment: Treated as a taxable event for LTCG/STCG. and  Exit load + GST can erode returns if done prematurely.

Current Rules You Must Know about LTCG on Equity Mutual Fund

LTCG on Equity Mutual Funds: 12.5% tax on gains above ₹1.25 lakh per financial year. & Applies if units are held for >12 months.

How to reduce Long-Term Capital Gains tax on mutual funds.

What is LTCG?

• Tax on selling equity mutual funds after 12 months.
• 12.5% tax on gains above INR 1.25 lakh/year.
• No indexation benefit for equity LTCG.
• Why optimize : Because tax saved = more money compounding for you.

How Switching Helps

• Switching = Sell Fund A → Buy Fund B.
• If holding >12 months, – Tax only on gains till date.
• Cost resets higher, reducing future taxable gains.
• Less tax in future due to higher purchase cost.

Smart Tips- how to reduce LTCG tax on mutual funds.

a) Hold 12+ months before switching.
b) Use INR 1.25 lakh exemption every year.
c) Do switches near year-end.
d) Book losses to offset gains.
e) Avoid selling within 12 months (20% STCG).
f) Check exit load before switching.

By strategically switching and using the annual exemption limit, you can minimize LTCG tax and boost long-term returns.

GST update 2025 on Mutual funds get GST notices for exit load.

Goods and Services Tax notices issued to mutual funds for exit load charges: 

Directorate General of Goods and Services Tax Intelligence issued show-cause notices. And amount Involved is Around ₹150 crore; firms may contest the levy in court. Doe Recovery of tax on exit load charged by mutual funds.

• DGGI Clarification that In 2018, Goods and Services Tax department clarified that 18% GST must be paid on exit load. Basically Exit load is a fee charged by mutual fund companies when investors redeem or sell units before the lock-in period ends.
• Impact of Mutual funds get GST notices for exit load. :

• Notices sent to major mutual funds like Nippon India, Kotak Mahindra, ICICI Prudential, and others. CBIC had stated in 2018 that exit load is taxable under Goods and Services Tax.
• Mutual funds get Goods and Services Tax notices for exit load may impact on Industry like Asset management companies may challenge this levy in court. Some argue that exit load is an adjustment in NAV (Net Asset Value), not a separate service fee.
• Why This Matters for Investors : Exit Load + GST: If you redeem units early, you pay exit load plus 18% Goods and Services Tax on that fee. Taxpayer Always check exit load structure before switching or redeeming mutual funds to avoid extra costs.