Small mutual fund distributors are facing significant operational challenges due to new GST compliance requirements that have fundamentally altered their business models. Since April 2026, MF distributors must pay 18% GST on commission paid by mutual funds, forcing individual distributors to register for GST numbers and upload detailed expense proofs including office rent, technology software, and travel costs to claim GST deductions. As per The Hindu BusinessLine, Arpit Shah, an independent MFD from Surat, reported that his monthly income of ₹1 lakh has reduced by ₹20,000 due to the new regulations. The compliance burden has become particularly acute as AMFI norms require MFDs with GST registration to submit invoices between the 7th and 15th of each month, with payments released by the end of the same month. Distributors who miss this deadline face delayed income, as payments for invoices raised after the 15th are released in the following month, significantly impacting cash flow.
The Securities and Exchange Board of India (Sebi) has proposed easing restrictions on third-party payments in mutual funds by permitting such transactions in select cases, including salary deductions by employers for employee investments and commission payouts to distributors in the form of mutual fund units. According to the consultation paper issued on Wednesday, India Inc may soon be allowed to pay a part of employees' salaries in the form of mutual fund units. The regulator has now proposed payroll-linked SIPs in a draft circular dated May 20, 2026, which will allow the payday also to be the SIP instalment day. The proposal marks a departure from current regulations that require all mutual fund transactions must happen with the investor's verified bank accounts, to enable maintenance of a digital trail. The rules, which are in accordance with the Prevention of Money Laundering Act (PMLA), were framed to mitigate third-party payment risks among AMCs. The proposal comes on the back of feedback from the mutual funds industry seeking review of existing framework from the markets watchdog.
The Indian mutual fund industry has witnessed remarkable growth in systematic investment plans, with SIP contributions jumping to an all-time high of nearly ₹3.50 trillion in FY26, representing a 21% increase from FY25. According to NDTV Profit, SIP AUM is worth around ₹16.85 trillion, constituting 20.6% of the industry's total AUM, with contributing SIPs reaching approximately 96.5 million. This growth builds upon previous initiatives including SEBI's sachetisation of SIPs in February 2025, allowing micro-SIPs of ₹250 to democratise investing in smaller towns and target lower sections of society. The regulator's latest proposal for payroll-linked SIPs aims to further institutionalise SIP investing by integrating it into monthly payroll systems, potentially reducing SIP stoppage ratios and enhancing investment discipline among organised sector employees.
The regulatory changes have significantly impacted distributor income through reduced expense ratios on older assets. The highest TER (total expense ratio) for equity scheme with AUM of ₹500 crore was reduced from 2.25% to BER (base expense ratio) of 2.10%, while the lowest TER of 1.05% for equity schemes with assets over ₹50,000 crore has been reduced to 0.95% under BER. As reported by The Hindu BusinessLine, this has resulted in trail commission falling 5-7 basis points on older assets due to the lower BER. Anish Raut, a MFD from Bhubaneswar, noted that a 15-20% reduction in trail income genuinely makes one think on sustainability of a fully independent distribution model. The expense ratio reductions have particularly affected distributors who have been managing assets for years, as they now receive lower commission payments on their established client base.
Under the proposal, listed and EPFO-registered companies would be allowed to facilitate investments in mutual fund schemes on behalf of employees through payroll deductions. The regulator has proposed that only employees opting for the arrangement would be covered, and they would be allowed to choose schemes for salary deductions. As reported by Business Standard, SEBI said the proposed scenario acknowledges the established practice of employers offering various benefits and savings avenues to their employees. The mechanism would allow AMCs to accept consolidated payments for MF investments through salary deduction, providing a convenient, seamless and disciplined way for the MFD to invest in MF units and encouraging MFDs to save and invest for the long term. The option would be available for all listed and EPFO-registered companies and the AMCs themselves. SEBI has invited public comments on whether employers should be restricted from steering employees toward schemes managed by group AMCs, in order to prevent potential conflicts of interest.
Small MF distributors are increasingly turning to online platforms to navigate the complex GST compliance landscape and enhance their financial product offerings. According to The Hindu BusinessLine, Aditya Agarwal, Co-founder of Wealthy.in, noted that many distributors struggle with operational GST compliance as tasks that previously took a few hours are now stretching into 2-3 days, including documentation, reconciliation, invoice uploads and filing requirements. The complexity is compounded by digitally signed invoice files becoming too large to upload to GST portals after digital signature, forcing teams to spend additional time on troubleshooting. Technology platforms are addressing these challenges by taking care of GST compliance layers with AMCs, allowing distributors to avoid separate coordination with every fund house. Arpit Shah from Surat emphasized that moving to technology platforms makes practical sense as it brings software, operations, marketing and client engagement together in one place, enabling distributors to serve far more clients than before while maintaining operational efficiency.
