Starting July 1, 2020 Stamp duty would be levied on various transactions in Mutual Funds. This post explains the impact of stamp duty on mutual funds on your investments.
What is the rule on Stamp Duty on Mutual Funds?
Stamp duty would be levied on purchase and transfer of mutual fund effective July 1, 2020. The stamp duty would be 0.005% in case of purchase and 0.015% in case of transfer.
Purchase of Mutual Fund can be following scenarios:
- New investment in Mutual Funds using Direct method or through intermediaries
- Purchase through SIP (including SIPs which started on a back date)
- Switch-in of units
- STP (Systematic Transfer Plan)
- Dividend reinvestment
These type of purchase transactions would attract 0.005% stamp duty. This means Rs 5 for every Rs 1 Lakhs.
Transfer of Mutual Funds can be:
- Purchase of ETFs or close ended mutual funds through stock exchanges
- Transfer of mutual fund units from one demat to another demat account
These type of transfer transactions would attract 0.015% stamp duty. This means Rs 15 for every Rs 1 Lakhs.
How would Stamp Duty on Mutual Funds impact Investment Returns?
There is negligible impact for long term investors. However, for people parking money for short term in liquid mutual funds, there would be more impact. You can understand this by following example:
Amount invested: Rs 1 lakh
Expected Annual return in Liquid fund: 6% (~0.017% daily return)
If you park your money for 1 day. You would pay Rs 5 in stamp duty while the return would be Rs 17. So net of stamp duty you make Rs 12 (17 – 5). Earlier you could make Rs 17. This is almost 30% reduction in returns.
But worry not it does not impact most individuals but definitely would have negative impact on some businesses who used to park money in liquid funds for very short term.
SIP Vs. Lumpsum – Which is the Best way to Invest in Mutual Fund?
There is always a debate on what is the right way to invest in Mutual Funds – SIP or lumpsum? We give you examples and situations on which of the investment method outperforms. Do read SIP Vs. Lumpsum – Which is the Best way to Invest in Mutual Fund?
Additionally Read about common myths about SIP investment in Mutual Funds
Stamp Duty on Mutual Funds FAQs
✅How much is the Stamp Duty on Mutual Funds?
The stamp duty on purchase of a mutual fund is 0.005%. This means you pay Rs 5 for every Rs 1 lakh invested in Mutual Funds. The stamp duty is 0.015% for transfer. It translates to Rs 15 for Rs 1 lakh investment.
✅How to pay stamp duty on mutual funds?
The stamp duty will automatically be deducted by the mutual fund’s RTAs (CAMS, KARVY, etc) and paid to the government.
✅Is the Stamp Duty on Mutual Funds applicable while selling?
No, the stamp duty is applicable while purchasing only. There is NO stamp duty while selling the funds.
✅Does it impact my existing Mutual fund investments (invested before July 1, 2020)?
No, the mutual funds invested before July 1, 2020 are not impacted in anyway.
✅Is the stamp duty applicable for SIP (Systematic Investment Plan)?
Yes, stamp duty for Mutual funds is applicable for any type of purchase – SIP or lumpsum.
✅What happens if the SIP started before July 1, 2020?
All SIP instalments are considered fresh purchase. So, for all future SIP instalments Stamp duty would be applicable.
✅Is the stamp duty applicable for STP (Systematic Transfer Plan)?
STP means you first invest in a Low risk Debt mutual fund and then transfer the money from this fund to another riskier fund like equity or balanced fund. So technically when you invest in first fund, it’s a purchase and hence stamp duty would be applicable. At the time of STP, the earlier unit is sold and new unit is purchased in Second Fund. Since it’s a purchase, stamp duty would be levied again.
✅What happens to Stamp Duty in case of Mutual Fund Switch?
Switch means selling in one fund and buying another. So, in this case stamp duty would be levied while buying the mutual fund unit. So yes, Switch would lead to levy of stamp duty.
✅Would Stamp Duty be levied in case of Mutual Fund Dividend reinvestment?
Dividend Reinvestment is purchase of fresh units using the dividend paid. Hence stamp duty would be charged for dividend reinvestment.
✅Is stamp duty on Mutual fund levied if the purchase is Direct?
The stamp duty is levied on purchase of mutual fund irrespective of mode of purchase. So it does not matter if the mutual fund is purchased directly through AMC website or through agent, stamp duty of 0.0005% would be levied.
✅What is impact of Stamp Duty on Mutual Funds on my investment returns?
The stamp duty is 0.0005% of the purchase amount. For investment of Rs 1 Lakh you would pay Rs 5 as stamp duty. So, money invested would be Rs 99,995. This is hardly any impact on your returns.
However people or businesses who park money for 1 – 2 days in liquid funds may see returns reduce by more than 30%.
✅Is the Stamp duty applicable for all mutual funds?
Stamp duty is applicable for all mutual funds including debt fund, international funds, Equity fund, international fund, etc.
✅What is stamp duty if I buy Mutual Funds on Stock Exchange?
If you buy closed ended funds or ETFs on stock exchange, it’s considered a transfer from seller to purchaser. In this case the applicable stamp duty rate be of 0.015%