SEBI Net Settlement Mutual Funds 2026 | Cash Market Impact

What Happened?

In September 2026, SEBI (Securities and Exchange Board of India) has proposed a significant change to how mutual funds settle their cash-market transactions. The regulator is seeking public comments on allowing mutual funds to net their fund obligations for outright cash-market trades, while retaining gross settlement for securities. This means mutual funds can offset their cash inflows and outflows against each other, but will continue to track each security individually during settlement.

Background & Legal Context

Understanding this proposal requires clarity on two tax-related aspects under the Income Tax Act 2025:

1. Fund Settlement Mechanism & Tax Character

Currently, mutual funds follow gross settlement norms, meaning every rupee received and every rupee paid out is tracked separately. Under Section 2(24) of the Income Tax Act 2025 (which defines 'income'), the character of transactions and their settlement methodology can impact:

• The timing of income recognition for the fund house
• The treatment of capital gains/losses for unitholders
• The deduction eligibility under Section 57 (expenses of management) for mutual fund companies

Net settlement of funds means mutual funds will only transfer net cash amounts to exchanges/clearing corporations, not gross amounts. This is different from how it works today.

2. Applicability to AY 2025-26 and AY 2026-27

Since this proposal was made in September 2026, it is likely to affect:

• AY 2026-27 (FY 2025-26): Where net settlement rules may be implemented if approved immediately
• AY 2027-28 (FY 2026-27): Where full compliance and reporting will be mandatory

The Income Tax Act 2025 requires all mutual fund transactions to be reported under Schedule FA (financial assets) as per new reporting norms. The net settlement proposal will need alignment with these reporting requirements.

3. GST Implications (if any)

While SEBI's proposal is primarily a settlement mechanism change, it may have indirect GST implications. Under GST law, mutual funds are treated as 'financial services' and are exempt from GST. However, the settlement methodology change should not affect this exemption as it only changes the cash movement flow, not the nature of the service.

What Does This Mean for You?

For Mutual Fund Investors

The net settlement proposal has several practical implications:

• Faster fund transfers: Since only net amounts are moved, there could be faster credit of redemption proceeds to your bank account
• No impact on returns: Your capital gains, dividends, and cost of acquisition remain unchanged. Tax liability for investors remains exactly the same
• NAV calculation: The NAV (Net Asset Value) of mutual fund units will not be affected as the investment portfolio and liabilities calculation method remains unchanged
• Statement clarity: Your mutual fund statement will show the same details; only backend settlement happens differently

For Mutual Fund Houses

This is more significant for fund managers:

• Working capital improvement: By netting cash obligations, MF houses can reduce idle cash balances and deploy capital more efficiently
• Tax reporting changes: Under Section 92(3) of the Income Tax Act 2025 (Transfer Pricing), if net settlement reduces inter-fund cash movements, transfer pricing documentation may need revision
• Expenses of management: Section 57 of the Income Tax Act 2025 allows mutual funds to deduct reasonable expenses. Net settlement could potentially reduce transaction costs, which must be reflected in lower management fees if SEBI mandates it
• Audit trail compliance: Under Section 44AB (audit requirement for businesses)**, mutual fund houses must maintain proper records of net settlement reconciliation