Stamp Duty On Mutual Funds Impact

Introduction Of A Stamp Duty On Mutual Funds

After much postponing since the beginning of the year, the government has finally decided to implement a Stamp Duty on all kinds of mutual fund purchases. It will include investments in Systematic Investment Plan (SIP), lump sum, Systematic Transfer Plan (STP) and even dividend investments. 

The Stamp Duty will be levied on all types of funds including equity, gold, liquid and debt. It is to be noted that the charge will be levied only on investment and not on redemption. It is, in one way, a kind of entry load put on the investment by the government.

The Stamp Duty came into effect after the Finance Act of 2019, amended the Stamp Act of 1899, to allow the state to collect duty on all securities market instruments including mutual funds. It was originally to be implemented from 9th January 2020 but got postponed, to be effective from 1st July 2020 onwards.

What Will Be The Amount of Stamp Duty Charged?

Stamp Duty on mutual funds will be charged at the rate of 0.005% of the investment amount at the time of purchase. It means that when you buy mutual fund units, you will be paying a duty of 0.005% on the Net Investment Amount. The net investment will be calculated by deducting any transaction charges you pay from the total investment amount.

The transfer of mutual fund units between one demat account and another whether market or off-market, will be charged at 0.015%. The same rate is also applicable for buying mutual fund units listed on stock exchanges including ETFs, closed ended investments etc. 

How Will This Affect Your Mutual Fund Investments? 

Let’s tell you in the simplest words how your investments will be affected. Say, you wish to make an investment of Rs.1,00,000 and the platform transaction charges are Rs.200. This makes the total amount of Rs.1,00,200. Since the Stamp Duty will be charged at 0.005% of your Net Investment Amount, the calculations are:

Net Investment Amount = Total Amount – Transaction Charges
Net Investment Amount = 1,00200-200= Rs.1,00,000
Stamp Duty = 0.005% of Rs.1,00,000 = Rs.5

For dividend reinvestment, it will be imposed on the dividend amount minus tax deducted at source (TDS). 

Since, this duty will be levied on all types of funds, all of them will get impacted but the most impact will be seen on short term funds. Funds like liquid funds, and overnight funds, will see the most impact on their returns since they are quite short term.

Here’s a table showing the impact of Stamp Duty in the long and short term:

Conclusion On The Effects of Stamp Duty On Mutual Funds

As you can see in the table above, the impact of Stamp Duty on long term and short term investments is quite different. Since, the impact over a longer term is next to negligible, you need not concern yourself with the impacts of the stamp duty so much if you are a long term investor. As for overnight funds or short term liquid funds, you will definitely feel the impact of that 0.005%. 

As far as your portfolio is concerned, it will be a good idea to not make frequent changes in your portfolio. Reason being, making multiple fresh purchases will draw multiple Stamp Duty payments. However, if you are seeking long term returns then you are good to go since the returns will see barely any impact.  


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