The applicability of the stamp duty on mutual funds was initially scheduled for January but was then postponed to April and finally made applicable from July 2020.
From July 01, 2020, stamp duty has been levied on the purchase of mutual funds, via any mode, including lumpsum, systematic investment plan (SIP), or systematic transfer plan (STP). Even switch-in transactions and dividend reinvestment are subject to stamp duty. However, stamp duty won’t be applicable to the redemption of units. The stamp duty will be applicable to all mutual funds, be it equity mutual funds or debt mutual funds.
The stamp duty will be levied at a rate of 0.005 per cent on the purchase or switch-in amount. For dividend reinvestment, it will be levied on the dividend amount minus tax deducted at source (TDS) while for purchase, it will be imposed on the purchase amount less any other charges such as a transaction charge. Said that, the stamp duty will also be levied on the transfer of mutual fund units. This means that even for the transfers between Demat accounts, stamp duty will be levied at the rate of 0.015 per cent.
Say for instance, if your purchase amount is Rs 1 lakh and the transaction charge is Rs 100, then the net purchase cost will be Rs 1,00,100. The stamp duty will be levied on Rs 1 lakh and not on Rs 1,00,100. Therefore, at the rate of 0.005 per cent, it will be Rs 5.
When you buy units, the stamp duty will be auto-deducted by the registrar and transfer agent (RTA) of the mutual funds. Due to this, you will now get fewer units. Suppose, you invest Rs 1,000 in a mutual fund at a net asset value (NAV) of Rs 10 then, instead of getting 100 units, you may end up getting 99.995 units due to the stamp duty deduction.
As the stamp duty is levied on the purchase and not redemption, it is similar to the entry load, which was abolished by Securities and Exchange Board of India (SEBI) in 2009. Consequently, investors with a short investment horizon, of less than 30 days, will be impacted more because of the stamp duty.
As per the report from B&K Securities, if liquid funds are generating 3.5 per cent returns, with a seven-day holding period, then the return will fall to 3.24 per cent. With a 30-day holding period, returns will be 3.44 per cent post accounting for the stamp duty. Similarly, with a 90-day holding period, it will be 3.48 per cent, which is a mere 0.02 per cent lower than the pre-stamp duty returns.
The impact is much higher in the case of overnight funds. As per the illustration put forth by B&K Securities, assuming pre-stamp duty returns of 2.70 per cent falls to 0.87 per cent if held for a single day. With a seven-day period, the returns of 2.70 per cent fell to 2.44 per cent. Having said that, the investors, who tend to churn their portfolios, are likely to have a greater impact of stamp duty levying as it has been imposed on every purchase made from now on.