Stamp Duty on Mutual Funds
Last Updated on November 15, 2021 by Chitale CFS Pvt Ltd
Stamp duty on mutual funds of 0.005% will be levied on the purchase of mutual funds from 1st July 2020. It will be applicable to all types of mutual funds including systematic investment plans (SIPs), systematic transfer plans (STPs), lump sum investments and dividend reinvestment.
Mutual fund stamp duty will be levied on both equity and mutual funds. According to livement, The stamp duty will be a one-time charge and will be deducted by the registrar and transfer agent (RTA) of the mutual fund. You do not need to pay the stamp duty separately.
Stamp duty on mutual fund will not be applicable on redemption of units. That is why this stamp duty charge is somewhat similar to the entry load which was cancelled by SEBI in 2009.
The mutual fund stamp duty charges were supposed to take effect from January 9, 2020 earlier but extended to April 1, 2020 later. The date was again finalized to July 1, 2020.
From 1st July 2020, the stamp duty on mutual funds will be levied on the purchase as well as switch-in amount. Stamp duty of 0.015% will also be imposed on the transfer of mutual fund units between demat accounts.
As far as the dividend reinvestment is concerned, the stamp duty will be imposed on the dividend amount after deducting the TDS (tax deducted at source).
The stamp duty on mutual funds in case of purchases will be imposed on the purchase amount after deducting any other charges including transaction charges.
Example of stamp duty deduction in Mutual Funds:
Let’s assume you are purchasing mutual fund units worth Rs. 1,00,000 and the transaction charge is Rs. 100.
The net purchase cost for you will be Rs. 1,00,100 but the stamp duty will be imposed on Rs.1,00,000 at not on the net purchase cost of Rs. 1,00,100
So in this case the mutual funds stamp duty charged will be 0.005% of Rs. 1,00,000 which is Rs. 5
If we assume NAV of Rs. 10
Mutual Fund units you will get after Stamp Duty charges:
If we assume NAV of a mutual fund unit as Rs.10, the transaction amount will be
=Transaction Amount-Transaction Charges-Stamp Duty=1,00,100-100-5= Rs. 99,995
Total Number of mutual fund units you will purchase=99,995/10= 9,999.50
Impact of Stamp Duty on mutual funds:
The impact of stamp duty on long-term mutual fund investments by retail investor will be nominal.
The impact of mutual funds stamp duty will be higher for short term investors. Although one time mutual fund stamp duty charges are 0.005%, if an investor invests just for one month, the annualized cost would be 0.06%. In case the investment is just for a week, the annualized cost would be 0.26% and 1.82% for one day investment horizon. So, shorter the duration of investment, more will be the impact of stamp duty on mutual funds. Stamp duty will impact more to companies or financial institutions who invest in liquid or overnight schemes.
On the contrary it will impact less to long term investors. As the stamp duty will be a one-time charge, even if an investor who is investing Rs. 1,00,000 in a mutual fund scheme and holding it for two years, the investor will need to pay a duty of Rs. 5 only.
Further, government has also imposed stamp duty on capital market instruments as shown in below table:
|Description||Applicable new rates|
|Issue of security other than debenture (including mutual fund units)||0.005%|
|Transfer of security other than debenture on delivery basis (including transfer of mutual fund units)||0.015%|
|Transfer of security other than debenture on non-delivery basis||0.003%|
|Derivatives – Futures (equity and commodity)||0.002%|
|Derivatives – Options (equity and commodity)||0.03%|
|OTC Currency and interest rate derivatives||0.0001%|
|Repo on corporate bonds||0.00001%|
These rates will be similar for all investors irrespective to the investor’s location. Nevertheless, government has clarified that stock exchanges will track the investor’s origin to distribute the stamp duty among states.
Since most mutual funds deal with share market, the mutual fund will need to pay the stamp duty as and when the fund manager executes a transaction. Hence the impact of mutual funds stamp duty would be more on funds with high turnover ratio.
What investors should do?
Retail mutual fund investors should not be worried about this stamp duty fees and it will not hurt the long term investors.
We would suggest choosing the most suitable mutual fund at first time with the help of your financial advisor. If you choose wrong fund, then switching from one scheme to another will attract repeated stamp duty.
It is also advisable to invest by keeping long term horizon as it will reduce the impact of stamp duty.
Why Chitale CFS Pvt Ltd?
Chitale CFS Pvt Ltd offers wide variety of investment avenues for short as well as long term investment needs. With more than 30+ years of experience, we are one stop solution for a number of financial products like Mutual Funds, Insurance, Bonds, Fixed Deposits etc. We serve our clients with highest standard of transparency and integrity by putting investor’s interest first.
Mutual fund investments are subject to market risks. Please read the offer document carefully before investing