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Explained: How stamp duty on mutual fund purchases will impact investors

While all categories of mutual funds (except for ETFs) will attract stamp duty for the first time, shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: July 2, 2020 8:15:54 am
Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent

Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent and any transfer of security (MF units) will attract a stamp duty of 0.015 per cent. The government had introduced changes to the Stamp duty Act last year by introducing a uniform rate of stamp duty on trading of shares and commodities.

While all categories of mutual funds (except for ETFs) will attract stamp duty for the first time, shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states. While the execution of the same was earlier set for January 9, 2020, it was extended to April 1, 2020 and then again extended to July 1, 2020. Here’s a look at what it means:

Where all will it be applicable?

The stamp duty will be applicable on all transactions, including shares, debt instruments, commodities and all categories of mutual fund schemes.

As for mutual funds, it will be applicable on all fresh purchases, including the fresh monthly purchases in previously registered Systematic Investment Plans. It will also be applicable if investors switch from one scheme to another and also in case of dividend reinvestment transactions. Transfer of units from one demat account to another, including market/off-market transfers, will also attract stamp duty.

How does it impact the investor?

The impact on long-term investments by retail investor is nominal. Since the stamp duty will be charged as one-time charge, if an investor invests Rs 1 lakh in a mutual fund scheme or in a stock and holds it for two years, he will have to pay a duty of only Rs 5. In fact, it will be marginally lower as the stamp duty is applicable on the net investment value i.e gross investment amount less than any other deduction like transaction charge. There is no duty at the time of redemption.

However, 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. While the one time charge is only 0.005 per cent, if an investor has only one-month investment horizon, the annualised cost would rise to 0.06 per cent. In case the investment horizon is one week, the annualised impact cost would be 0.26 per cent and on a one day investment horizon, the cost works out to 1.82%.

It will also impact share purchase by individuals in several states where the rates earlier were lower than the new uniform rate of 0.005 per cent.

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How much revenue can it generate for the government?

In the financial year 2019-20, the mutual fund industry mobilised aggregate funds of over Rs 188 lakh crore. A high portion of that was in overnight funds or liquid funds. A 0.005 per cent stamp duty on this amount works out to Rs 940 crore. If the industry continues to mobilise funds to the tune of Rs 190 lakh crore or higher, it will generate revenues of nearly Rs 1,000 crore for the government from mutual fund transactions itself.

The annual turnover for NSE in FY20 was 89.98 lakh crore. A 0.005 per cent stamp duty on this would mean a total duty of nearly Rs 450 crore as per the new rates (earlier different states charged different rates of stamp duty on share purchase).

What should investors do?

Retail MF investors should not worry too much about it as the fee is nominal. However, they should be careful in selection of the right investment category. If they pick a wrong category and then keep switching from one scheme to another, then they will end up paying stamp duty repeatedly on the same investment amount. Also, since a longer investment horizon reduces the stamp duty impact cost, investors should invest in a scheme for the long term.

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