How SEBI caps mutual fund Total Expense Ratio: the AUM-linked slabs and B30 incentive explained

The single biggest controllable drag on a mutual fund investor's long-term return is not the market — it is the Total Expense Ratio (TER), the annual fee a scheme deducts from its net asset value every day. Since the SEBI circular dated 5 June 2018 (reference SEBI/HO/IMD/DF2/CIR/P/2018/91), that fee has been capped through a set of assets-under-management-linked slabs that force larger schemes to charge less, alongside a special 30 basis point incentive designed to push sales beyond India's 30 largest cities. This piece unpacks exactly how those ceilings work and why the identical fund can quietly cost you almost twice as much depending on which plan you buy.

To make the numbers concrete, we compare the two versions every open-ended scheme has been required to offer since 1 January 2013 — the regular plan, which embeds distributor commission inside the fee, and the direct plan, which strips it out. Both sit under the exact same SEBI TER ceiling, yet the everyday gap between them, commonly 0.50% to 1.00% a year, compounds into several lakh rupees over a 20-year horizon. If you want to see the expense ratio on your own holdings work against you, our SIP calculator lets you model the drag directly.

How SEBI's AUM-linked TER slabs work

Under Regulation 52(6)(b) of the SEBI (Mutual Funds) Regulations, 1996, as restated by the 5 June 2018 circular, the maximum TER an open-ended scheme may charge falls in steps as the scheme's daily net assets grow. The logic is straightforward: a fund managing Rs 40,000 crore does not cost twenty times more to run than one managing Rs 2,000 crore, so SEBI compels the manager to pass those economies of scale back to unitholders. The ceiling is also set lower for equity-oriented schemes than for other (largely debt) schemes at every single slab.

The slabs apply on a tiered basis, exactly like income-tax brackets — the first band of assets under management is charged at the top rate, the next band at a lower rate, and so on. The full table from the June 2018 circular reads as follows.

Because the structure is marginal, a large equity scheme's blended TER lands somewhere between 1.05% and 2.25% depending on its size — a scheme with Rs 10,000 crore in equity assets cannot legally charge the full 2.25% on the whole corpus, only on its first Rs 500 crore. For close-ended and interval schemes the June 2018 circular sets a flatter ceiling of 1.25% for equity-oriented schemes and 1.00% for other schemes, reflecting their fixed-tenure structure.

Two categories of cost sit outside these headline caps. First, brokerage and transaction charges for executing trades are permitted up to 0.12% of the trade value for cash-market transactions and 0.05% for derivatives, per the same circular. Second, Goods and Services Tax on the investment-management and advisory fee is charged over and above the slab limit. Everything else — registrar fees, audit, marketing, trustee fees and the distributor's trail commission — must fit inside the TER ceiling shown above.

The B30 incentive explained

To widen mutual fund penetration outside the metros, the 5 June 2018 circular permits a scheme to charge an additional expense of up to 30 basis points (0.30%) on daily net assets, funded entirely by inflows from beyond the top 30 cities, known in the industry as B30 locations. The additional charge is conditional: inflows from these smaller towns in a given period must be at least 30% of the scheme's gross new inflows, or 15% of the scheme's average AUM for the year to date, whichever figure is higher. Where the B30 inflow falls short of that threshold, only a proportionate additional expense is allowed.

SEBI also tightened how this money may be paid to distributors. The B30 commission may be paid only as an upfront incentive, restricted to retail inflows — defined as individual investors' contributions up to Rs 2 lakh per transaction — and it carries a one-year clawback: if the investor redeems or switches out within 12 months, the upfront commission is recovered from the distributor. This clawback, expressed in basis points of the sale, is what stops the incentive being gamed through short-lived, churned investments. For an investor, the practical takeaway is that a fund actively gathering B30 money can legally run up to 0.30% dearer than its headline slab rate implies.

Side-by-Side Comparison: regular plan versus direct plan

Every open-ended scheme carries the same portfolio, the same fund manager and the same SEBI TER ceiling under two labels. The regular plan pays a trail commission to your distributor out of the fund's assets; the direct plan, mandated for all schemes from 1 January 2013, pays no commission and therefore reports a lower TER and a higher net asset value. The difference is not the market's doing — it is purely the embedded commission.

Consider a purely illustrative comparison — these are assumed figures, not any specific fund's returns. Take a monthly SIP of Rs 10,000 for 20 years (Rs 24 lakh invested in total) in an equity scheme delivering a 12% gross return. Assume the direct plan charges a 0.75% TER (net return 11.25%) and the regular plan charges 1.50% (net return 10.50%). On those assumptions the direct plan grows to roughly Rs 90.3 lakh, while the regular plan reaches about Rs 81.8 lakh — a gap of close to Rs 8.5 lakh created entirely by a 0.75% annual fee difference. Run your own assumptions through our SIP calculator or, for a one-time investment, the lumpsum calculator to see the effect on your corpus.

The reason a small percentage produces a large rupee gap is compounding: the fee is levied on the whole balance every year, so as the corpus swells the absolute cost of a 0.75% charge grows with it. This is also why low-cost index funds, whose direct plans frequently sit well below 0.50%, have drawn record inflows — AMFI data for the year to March 2026 shows sustained equity inflows over a multi-year streak, with cost-conscious investors increasingly choosing direct plans and passive schemes.

Tax Treatment

The TER erodes your return before any tax is applied, because it is deducted daily from the NAV rather than charged as a separate bill. The tax you then pay depends on how equity or debt oriented the scheme is and how long you hold it. Following Budget 2024, effective for transfers on or after 23 July 2024, equity-oriented schemes (those holding at least 65% in domestic equity) attract a long-term capital gains tax of 12.5% on gains above Rs 1.25 lakh a year where units are held for more than 12 months. Where held for 12 months or less, short-term capital gains are taxed at 20%.

Debt-oriented schemes follow a different, harsher rule. For units acquired on or after 1 April 2023, gains on specified mutual funds are added to your income and taxed at your applicable slab rate under Section 50AA of the Income-tax Act, with no long-term rate and no indexation benefit — regardless of holding period. The 12.5% long-term rate and the Rs 1.25 lakh exemption simply do not apply to these post-April-2023 debt units. The table below summarises the position for a resident individual.

Because a lower TER leaves a higher NAV, the tax point is subtle but real: a direct-plan investor books a larger gain and therefore a marginally larger tax bill on the same underlying portfolio — but keeps far more after tax, since the extra return dwarfs the extra tax. The ELSS calculator can help tax-savers weigh the Section 80C benefit of equity-linked savings schemes against their expense ratios.

Who Should Pick Which

The choice between a regular and a direct plan, and between an active and a passive scheme, turns on how much guidance you genuinely need against the 0.50% to 1.00% you pay for it every year.

Choose the direct plan if you are comfortable selecting and reviewing funds yourself, or already pay a fee-only, SEBI-registered investment adviser separately. Over a 20-year SIP the illustrative Rs 8.5 lakh saved on our assumed 0.75% gap is money that stays invested and compounds for you rather than funding a trail commission. Self-directed investors building a core portfolio of two or three broad equity funds are the clearest candidates.

Choose the regular plan if you value hand-holding — periodic reviews, goal mapping, behavioural coaching through market falls — and would otherwise stall or make costly mistakes. For a first-time investor who might panic-sell during a 20% drawdown, a distributor charging an extra 0.75% may still leave you better off than going direct and abandoning the plan. The commission buys discipline, which for some investors is worth more than the fee.

On the active-versus-passive question, favour low-cost index funds and their sub-0.50% direct plans for efficient, large-cap segments where consistently beating the benchmark is hard, and reserve higher-TER active schemes for pockets — mid-cap, small-cap or thematic — where a manager's edge can plausibly justify a 1.50% or higher expense ratio. Always read a scheme's latest TER on the AMC website, which SEBI requires funds to publish and update, before you commit fresh money.

FAQ

What exactly is the Total Expense Ratio?

The TER is the sum of all annual operating costs of a mutual fund scheme — management fees, distribution commission, registrar and audit charges and marketing — expressed as a percentage of the scheme's daily net assets. Under the SEBI circular of 5 June 2018 it is capped by the AUM-linked slabs, ranging from a maximum of 2.25% for a small equity scheme down to 1.05% for one above Rs 50,000 crore.

Why does the same fund have two different expense ratios?

Because every open-ended scheme runs both a regular plan and a direct plan. The regular plan's TER includes the trail commission paid to your distributor; the direct plan, mandatory since 1 January 2013, excludes it. The portfolio is identical, so the direct plan's lower TER simply means a higher NAV and higher returns for the same investment.

What is the B30 additional expense?

It is an extra charge of up to 30 basis points (0.30%) of daily net assets that a scheme may levy to reward inflows from beyond India's top 30 cities, per the 5 June 2018 circular. It applies only when B30 inflows are at least 30% of gross new inflows or 15% of average AUM, whichever is higher, and the resulting commission is subject to a one-year clawback.

How is the TER deducted from my investment?

It is not billed separately. The scheme accrues its TER daily and deducts it before declaring the net asset value, so the NAV you see is already net of expenses. A 1.50% TER means roughly 0.0041% is shaved off the fund's value each day, which is why the drag is invisible yet cumulatively large over 20 years.

Are index funds always cheaper than active funds?

Not automatically, but usually. Passive index funds track a benchmark without a stock-picking team, so their direct-plan TERs often sit below 0.50%, well under the 1.50% to 2.25% range common for actively managed equity schemes. The same SEBI slabs cap both, but passive funds voluntarily operate far below the ceiling.

Does a lower TER change my tax liability?

Indirectly. A lower TER produces a higher NAV and therefore a larger reported capital gain, so a direct-plan investor may pay marginally more LTCG at 12.5% above the Rs 1.25 lakh exemption. The higher return, however, far outweighs the slightly higher tax, leaving the direct-plan investor better off after tax on the same portfolio.

Where can I check a scheme's current TER?

SEBI requires every asset management company to publish the day-to-day TER of each scheme and plan on its website, and to disclose any change before it takes effect. AMFI also aggregates scheme-level disclosures, so you can verify both the regular and direct plan TER before investing rather than relying on a distributor's summary.