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Stamp Duty on Mutual Funds

Ganesh D

With effect from July 1, 2020, the Government of India has imposed stamp duty of 0.005% on all mutual fund purchase transactions. This duty will apply to all categories of mutual funds including equity, debt, hybrid, solution-oriented, and liquid funds.

Below are the key changes:

  1. Stamp duty @0.005% of the investment amount will be applicable at the time of issue of units in both physical and demat mode.
  2. Units will be allotted for the investment amount available post deduction of stamp duty. The number of units allotted to the unit holders would be lower to that extent.
  3. Stamp duty will be applicable to all transactions pertaining to inflows in the scheme i.e. purchases - includes Lumpsum, SIPs, STP-In, Switch-In, and Dividend Reinvestment, etc. However, stamp duty does not apply to transactions such as Redemptions, STP-out, and Switch-out.

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How does it affect your investments?

The stamp duty will be imposed at a rate of 0.005% on the purchase or switch-in amount. Apart from this, stamp duty will also be imposed on the transfer of mutual fund units such as transfers between demat accounts at 0.015%. Due to its design, the stamp duty is likely to have the most impact on short holding periods of 90 days or less.It means it will mainly affect your investments that were held for a very short duration because of the flat rate of stamp duty. Apart from that, frequent churn in your portfolio can also reduce the overall return of your portfolio.

For example, assume you invest Rs.1 lakh in any mutual fund scheme. Based on the applicable stamp duty of Rs. 0.005%,

 Rs.5 will be deducted from the gross investment of Rs.1 lakh and only Rs.99,995 will be invested.

PRO TIP: Apart from the above charges, you might also be charged commission by your distributor. Choose platforms which  offer you a free mutual fund transaction portal such as 7Prosper to save high commission charges.

How does it impact you?

The impact is nominal on long-term investments. However, the impact is higher for investors with a short-term investment horizon and those who invest in liquid and overnight schemes of mutual funds.

While the one-time stamp duty applicable is only 0.005 percent, if an investor has only a one-month investment horizon, the annualized cost would rise to 0.06 percent. In case the investment horizon is one week, the annualized impact cost would be 0.26 percent and on a one-day investment horizon, the cost works out to 1.82%.

What should you do?

As investors in mutual funds one should understand that the impact cost on MF transactions will now be higher to the extent of stamp duty.  Therefore it’s important to factor in the stamp duty along with the capital gains and loads when you are rebalancing or restructuring your Mutual Funds portfolio. Repeated switching between one scheme to another will result in you paying stamp duty multiple times on the same investment amount.

Not sure of your next move?

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About the Author
Ganesh D
Ganesh is an associate at 7Prosper. Loves personal finance as it has all the power to change and better lives. The synergy between education and commitment to help clients create financially secured lives is what helps him excel. When not in the finance bubble, he is a part entrepreneur and a part nerd.

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