If you were stumped to read that you will now be paying goods and services tax (GST) on your mutual fund exit load, you are not alone. The frequently asked questions (FAQs) issued by the Central Board of Indirect Taxes and Customs (CBIC) reveals the impact of GST on some financial services.

The FAQs explain tax implication on various charges, penalty and fees such as “exit loads” charged by mutual fund companies at the time of redemption, additional interest charged for default in payment of loan instalments and charges for late payment of dues on credit card outstanding. Here is how GST will impact your investments and financial transactions.

Impact on mutual fund investors

In case of mutual funds, expenses incurred by asset management companies (AMCs) are factored in the net asset value (NAV) of the scheme on a daily basis. However, exit loads are not included in the total expense ratio (TER) and charged at the time of redemption based on the scheme you have invested in and the tenure of your investment.

Typically, exit loads are nil or charged at a nominal rate in case of debt-oriented mutual fund schemes, if the redemption is made within a short period, say, 7 to 30 days from the date of purchase. However, in case of equity-based schemes, fund houses typically charge exit load of 1% of the NAV if the investor redeems from schemes within 365 days from the date of allotment.

In the recent FAQ, it has been clarified that the exit load will attract GST. However, “the load will not increase for the investor as GST is included in the existing load levy. The scheme on the other hand will lose out as the exit load amount credited back to the scheme will be net of 18% GST,” said a chief operating officer of a medium sized fund house,who is not an official spokesperson for the fund house.

He said the fund houses made a representation to the GST authorities and the service tax authority about this. In that they requested the tax to be withdrawn, and clarified that this is not a service provided to the investor, it is in fact, a levy to deter investors from exiting too soon. Their request hasn’t been accepted and thus fund houses are going to pay GST on exit load, but the tax will be included in the load itself.

All fund houses do not have clarity on this yet. Another fund house that Mint contacted was unclear about this issue and its treatment.

Impact on credit card holders

The FAQs clarified that additional interest charged for default in payment of instalment of a loan and charges for late payment of dues on credit card outstanding be chargeable to GST. “Credit card outstanding may comprise retail spends, EMIs and/or fees and charges pertaining to the use of credit card. However, GST is not applicable to the entire outstanding on credit cards. It is applicable only to fees and charges levied on credit cards. For example, components like interest charges, late payment fee or annual fee attract GST as per regulatory norms. Currently, the GST rate applicable is 18%,” said Pralay Mondal, senior group president – retail and business banking, Yes Bank Ltd.

While the new FAQs have brought clarity with regard to the implication of GST in the financial sector, many people continue to be puzzled how exit loads or fee on a default of loan payment can be considered “services” and attract GST.

Lisa Pallavi Barbora and Shaikh Zoaib Saleem contributed to the story