Stamp duty on mutual fund purchases and its impact on investors

Mutual funds are one of the most popular investment options available to every individual. It is a fund made from a carefully selected cluster of individual stocks or securities and other assets with an aim to provide good returns to the investors and maximize their wealth in the long term. There are multiple types of mutual funds that can cater to the investment needs of all types of investors whether they are risk averse or aggressive or whether they are looking for a short term or a long term investment. 

We have heard about stamp duty charges while making a purchase for a house property but not many know that stamp duty charges are also applicable on mutual funds investments as well. 

Given below are the details of stamp duty charges applicable on mutual funds and their impact on the investors.  

Meaning of stamp duty

Stamp duty is the tax that is levied on the sale or purchase of any asset, in this case, mutual fund units. Stamp duty was earlier applicable only on real estate purchase and sale transactions. However, from July 2020 onwards, stamp duty is also applicable on mutual fund transactions. 

Applicability of stamp duty on mutual funds

Investors have to pay stamp duty at the rate of 0.005% of the value of the units. This is a very nominal amount and is applicable at the time of purchase of mutual fund units. In the case of transfer of units from one Demat account to another, the rate at which stamp duty is charged is 0.015%. 

The applicability of stamp duty is applicable on all mutual fund transactions done through any mode of investment mentioned below,

1. Lump sum investment in any equity debt or balance fund
2. Systematic Investment Plan (SIPs) in any mutual fund
3. Dividend Reinvestment plans
4. Systematic Transfer Plan on any mutual fund

Stamp duty on mutual funds is exclusive of any other charges like GST, service charges, transaction charges, AMC fees, etc.  In the case of dividend reinvestment plans, stamp duty is levied on the dividend after deduction of TDS (wherever applicable)

Points to remember relating to stamp duty on mutual funds

There are several points to consider to understand the applicability of stamp duty on mutual fund transactions. Some of such points are highlighted below.

1. Stamp duty is applicable on all types of mutual fund schemes like,

• Equity mutual fund
• Debt mutual funds
• Hybrid mutual funds

2. Stamp duty is to be paid only in case when the investor is buying units of mutual funds or in case of transfer of units from one Demat account to another.
3. Stamp duty is to be directly deducted by the AMC and is not to be paid separately by the investor
4. The expenses of the stamp duty along with other charges like expense ratio, Securities Transaction Tax (STT), exit loads, broker fees, etc, outweigh the returns generated by the fund in the long run.

Impact on investors

With the introduction of stamp duty, most investors may become apprehensive about a mutual fund investment. These concerns are misplaced. The stamp duty on mutual fund transactions is not as high as in the case of real estate transactions. The amount of stamp duty is usually negligible, more so in the case of short term investments in mutual funds. The full effect of the entire 0.005% will be only when the investors invested in the fund for more than a year. Even that is not too high as stamp duty is a one-time payment. 

An example to show levy of stamp duty

To understand the impact of stamp duty on mutual funds for the investors, let us consider an example. 

Investor A has an investment opportunity to invest in Fund X for an amount of Rs. 10,000. Stamp duty on the transaction is at the rate of 0.005% of the investment, i.e., Rs. 0.50. Therefore, the amount that can be invested by investor A in Fund X will be Rs. 9,999.5 (10000-0.50). If the NAV of Fund X is Rs. 100, the number of units that will be available to investor A will be 99.995 (9999.5/100). The number of units that would be received by the investor in the absence of stamp duty will be 100 (10000/100). 

It can be clearly seen that the impact of the stamp duty on the number of units received by the investor is negligible. The impact of stamp duty on any mutual fund investment is inversely proportional to the period of holding. This means that the impact of stamp duty will be further reduced if the investment is held for a long term. Hence, it should not adversely impact the investment decision of the investor.  

Conclusion

Stamp duty was introduced for all mutual fund transactions entered after July 2020. This may seem to be an additional charge among the existing list of charges that are levied on mutual funds. However, the impact of this additional charge in the mutual funds is negligible. Investors do not have to be apprehensive by this additional charge and should not restrict their mutual fund investments. 

FAQs

1. Is stamp duty applicable in case of transfer of mutual fund investment to a nominee after the death of the original investor?  
A. No. Stamp duty is to be paid at the time of purchase of mutual fund units. Transfer of units to the nominee’s account does not warrant a stamp duty charge on mutual fund investment.

2. Is there a difference between investing through lump sum mode or through SIP after considering stamp duty charges?
A. No. The levy of stamp duty is irrespective of the mode of investment. It does not matter if the investor invests through lump sum or SIP modes as each transaction is considered as a fresh investment for the levy of stamp duty. 

3. Will stamp duty impact the NAV of the fund?
A. No. Stamp duty is the form of additional indirect tax levied on the mutual funds and is external to the factors contributing to or influencing the NAV of a fund. Hence, stamp duty will have no impact on the NAV of the fund.

4. Will the impact of stamp duty increase with the period of holding?
A. No. The impact of stamp duty is inversely related to the period of holding of an investment. Hence, the longer the holding period, the lower the impact. 

5. What are the other charges levied on a mutual fund investment?
A. The other charges levied in mutual fund investment other than stamp duty are 

• Expense ratio
• Exit load (if applicable)
• Transaction fees (Depending on the platform through which you invest)