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July 10, 2020

Stamp Duty to be levied on Mutual funds from July 1, 2020

by Rubina Dsouza in Stock Market

Stamp Duty to be levied on Mutual funds from July 1, 2020

Introduction

Stamp duty is the tax governments place on legal documents, usually in the transfer of assets or property. Governments impose stamp duties, also known as stamp taxes, on documents that are needed to legally record certain types of transactions. The Indian Stamp Act, levies stamp duty on the Instrument and not on transactions and this fact has been upheld by many courts.

The government had introduced changes to the Stamp duty Act by introducing a uniform rate of stamp duty on trading of shares and commodities. From 1st July 2020, all shares and mutual fund purchases will attract a stamp duty of 0.005% and any transfer of security (MF units) will attract a stamp duty of 0.015%. This will be applicable for systematic investment plans (SIPs) and systematic transfer plans (STPs). However, redemption of mutual funds will not come under this.

This duty will apply to all mutual funds – debt as well as equity, effectively acting as an entry load as allocation of units will be at net amount post deduction of stamp duty.

Transactions which will attract 0.005% stamp duty are:-

  1. Purchase of units
  2. Switch-in of units
  3. Systematic Investment or Transfer installments (SIP/STP).
  4. Dividend Reinvestment of Units.

Transactions which will attract 0.015% stamp duty are:-

  1. Buying units on stock exchange through a stock-broker e.g. ETF, closed ended schemes.
  2. Off-market transfer of units i.e. transfer of units from one demat account to another demat account.

The stamp duty will be auto-deducted

As and when one purchases a mutual fund, the stamp duty will be auto-deducted by the registrar and the transfer agent. One does not have to pay for it separately. Purchase of the unit will happen after deducting the stamp duty amount. 

Stamp duty to mainly affect short term investments

The impact on long-term investments by retail investor is nominal. The lower the holding period of investments, the higher will be the impact. The move could impact large institutional investors who mostly put their money in liquid schemes for shorter time periods. Many corporate treasuries deploy money for a short period of time as they need it for working capital requirements.

Let us refer to the table given below to understand the same:-

ParticularsScenario 1Scenario 2Workings
Amount Invested      1,00,000.00      1,00,000.00 
Stamp Duty (%)0.005%0.005% 
Stamp Duty Amount55Amount Invested * Stamp Duty %
Net Amount Invested          99,995.00          99,995.00Amount Invested – Stamp Duty Amt
No of days790 
% Return on Amount Invested3.50%3.50% 
Absolute Return67.1199862.9705Net Amount Invested * % Return * No of days/365
Market Value at redemption      1,00,062.12      1,00,857.97Net Amount Invested + Absolute Return
Actual Returns (%)                     3.24 %                     3.48%(Redemption Value – Amount Invested) / Amount invested *365/Days * 100

Thus, the impact is higher for investors with short-term investment horizon such as banks and corporates who invest in liquid and overnight schemes of mutual funds. It will have negative impact on the institutional clients who park their short term money in liquid or overnight funds. Decreasing yields and additional expense of stamp duty will have negative impact on the overnight/liquid category.

How would the stamp duty impact retail mutual fund investors? 

Investors investing a few lakh rupees will have little to no impact on their investments. However, corporate investors investing several crores and also investing for a few days to a month in categories such as overnight funds may see some impact. 
Hence, for corporates or Institutional investors, it does impact their returns but for retail investors, it is not a big pinch to the finances.

The stamp duty imposition will encourage investors to stay invested for a longer duration and not churn portfolio for higher yields as Investors in overnight/ liquid fund category with investment horizon of 7 days and below will have negative impact due to stamp duty levied.

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