All About Stamp Duty & its Impact On Mutual Fund Investments

According to orders issued by the Government of India, stamp duty will be levied on the purchase of mutual funds from July 1, 2020, onwards. The implementation was initially set for January but later pushed to April and then July, amid the COVID-19 related upheaval in the financial markets. Here’s a quick read to help understand the imposition of stamp duty on mutual funds and its impact on the investor.

The stamp duty will be collected on all categories of mutual funds (Debt, Hybrid, Equity, and Exchange-Traded funds). It applies to Direct and Regular mutual fund plans. The government will also impose the duty on Lump-sum Investments, Systematic Investment Plans (SIP),Systematic Transfer Plans (STP), dividend reinvestment transactions, and other products on similar lines. There is, however, no stamp duty on redemption, switch-outs, Systematic Withdrawal Plans (SWP),conversion from physical to Demat mode, and dividend payouts.

As per SEBI regulations, stamp duty at the rate of 0.005% will be charged on all mutual fund transactions. In other words, if ₹ 10,000 is invested in mutual funds, 50-paisa has to be paid as stamp duty. Also, the transfer of units between Demat accounts, including switching from dividend to growth, or vice-versa in the same scheme (direct and regular plans), will attract 0.015% stamp duty.

Investors have to pay an expense ratio to the asset management company (AMC), the transaction fee to the third-party platform, securities transaction tax (STT) for equity funds, exit load, and now stamp duty for their mutual fund investment .

The stamp duty will be auto-deducted by the registrar and transfer agent (RTA) of the fund when the units are purchased. The investor doesn’t have to pay the stamp duty separately.The duty will be levied on the value of mutual fund units after the withdrawal of other charges (AMC fee, GST, service charge, transaction charge, etc.). As a result, the money spent on investment will increase slightly. Example: Let’s assume your investment amount is ₹ 1,00,000Stamp duty is levied at 0.005% of 1 Lakh.Stamp Duty = ₹. 5Effective investment amount after deducting stamp duty = ₹ 1,00,000 - ₹ 5 = Rs 99,995Units will be allotted with funds equivalent to 99,995Do note that some investment platforms charge a separate transaction fee to the tune of a couple of hundreds. In such a scenario, the investible amount will reduce further.

For units under the dividend reinvestment plan, the stampduty will be imposed on the dividend amount after deducting TDS (tax deducted at source), if applicable. The balance amount will be allotted as fresh units. Example: If a dividend reinvestment scheme declares a dividend worth ₹1,000, it will incur a TDS of 10% at ₹100. The stamp duty will be applicable on 1,000-100= ₹900. Stamp duty payable: 0.005%*900= ₹0.045.

The stamp duty is a one-time charge imposed at the rate of 0.005% on the purchase of mutual fund schemes. The impact will be slight for a long-term holding but relatively higher if the tenure is shorter. Investments made in liquid or overnight funds to address contingencies may see a sizeable impact. Also, portfolios that are stirred frequently will bear the brunt. Meaning, switching one fund to another within the same month will attract double stamp duty and consequently erode returns.Let’s clarify this concept with an example. Example: The investment amount is ₹ 1,00,000Stamp Duty is ₹ 5The annualised cost depending on the holding period will be the following:

• 1 day: 1.825%
• 10 days: 0.18%
• 20days: 0.09%
• 30 days: 0.06%
• 60 days: 0.03%
• 180days: 0.01%
• 270 days: 006759%
• 365 days: 005000%

As you can see, the impact of stamp duty is less significant when the time horizon is longer. The above example indicates the cost effect on actual return reduces from 1.82% to 0.005% with an increase in the investment period from one day to 365 days.

The imposition of stamp duty on mutual fund investments will work like an entry load which SEBI cancelled in 2009. However, it should not be a big deal. The charge computed @0.005% on the issuance of units is trivial, whereas mutual funds have the potential to deliver high returns.So, what's the final takeaway? Pick quality schemes that are handled by competent fund managers and maintain a long-term perspective. This will not only avert the odds of paying stamp duty repeatedly, but also help maximise returns by the power of compounding.Happy Investing!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.