Stamp Duty on Mutual Funds from July 1

From July 1, 2020, a stamp duty of 0.005% will be imposed on the purchase of mutual funds. Here are a few important points:

• The stamp duty of 0.005% will be applicable for all purchases including SIPs and STPs and lumpsum, but not on the redemption of units. Further, a stamp duty of 0.015% will be applicable for transfer of units (off-market transactions).
• The stamp duty will apply to every single category of all mutual funds—debt, hybrid, equity, index funds and ETFs. It is applicable to direct and regular plans.
• You will be allotted units after deduction of stamp duty of 0.005%, making it akin to entry load. For eg. if you purchase units worth Rs. 1,00,000 then you’ll be allotted units worth Rs. 99,995 (i.e. Rs. 5 for every Rs. 1 lac investment)
• For units under dividend reinvestment, the stamp duty will be imposed on the dividend amount minus tax deducted at source (TDS). In case you invested into Dividend Reinvestment scheme and your fund declared a dividend worth ₹1 lakh. This dividend will incur a TDS of 10% at ₹10,000. The stamp duty will be applicable on 1 lakh-10,000= ₹90,000. Stamp duty payable: 0.005%*90,000= ₹4.5. 

How will your returns be impacted?

Scenario: Suppose you wish to invest ₹1 crore into Overnight Funds. The table below shows the impact on your returns for holding periods of 1 day, 7 days, 15 days and 1 month.

Scenario: Suppose you wish to invest ₹1 crore in Liquid Funds. Here’s how your returns would be impacted for different holding periods of 15 days, 1 month, 3 months and 1 year due to the stamp duty.

INDwealth Analysis

The above tables show that the impact of stamp duty would be the highest at 1.83%. (0.005%*365= 1.83%), if the holding period is just 1 day in case of Overnight Funds. However, as your holding period increases, the annualised impact on your return is reduced. If you hold the fund for 1 year, the impact is reduced to just 0.005%.

Overall, the stamp duty imposed will not affect the returns of your long-term investments. Reach out to your personal family wealth office to help you manage your mutual fund investments.