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Stamp Duty on Mutual Funds – How Will it Affect Your Returns?

Highlights

  • Do you know stamp duty will apply to your mutual fund transactions from July 1, 2020?
  • How will it impact your mutual fund returns? Let’s read this post and know the same

Stamp duty is an additional cost that will apply to mutual funds from 1st July 2020. The same was notified by the Ministry of Finance, Government of India earlier this year.

Let us understand the quantum and implication on returns.

What is the Rate of Stamp Duty Applicable on Mutual Fund Transactions?

Mutual fund transactions will be charged @ 0.005% of the net investment value.

What is Net Investment Value?

Net investment value is gross investment value less transaction charge, if any. For e.g. you invest INR 1,00,100 in a mutual fund scheme and the investment charge is INR 100 then the net investment value will be 1,00,000(1,00,100-100).

How Will the Stamp Duty be Calculated?

Using the above example, stamp duty will be 0.005% of 1,00,000 i.e. INR 5.

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Which All Mutual Fund Schemes Will the Stamp Duty be Applicable to?

Stamp duty will be applicable to all mutual fund schemes.

Will the Stamp Duty be Applicable on Future Installments of SIPs Initiated in the Past?

Yes, the stamp duty will be levied on all SIP installments which will be debited in the future irrespective of their start date. So, if you started a monthly SIP of INR 5000 in 2015 and it is supposed to run till 2025, then all monthly SIP transactions from 1st July onwards will attract stamp duty.

Is the Stamp Duty Applicable on Mutual Fund Holdings in Both Physical and Demat Form?

Yes, it is applicable to both. Transfer of units from one Demat to another Demat account will also attract stamp duty. However, stamp duty will not apply to the transfer of units from broker to investor account since no consideration is involved and stamp duty has already been deducted when units were allotted.

Which All Mutual Fund Transactions Will Attract Stamp Duty?

Stamp duty will be applicable to purchases, switches, and the dividend reinvestment amount.

Will the Stamp Duty be Applicable on Redemption of Mutual Fund Units?

No, stamp duty will not apply to the redemption of mutual fund units.

Will the Amount of Stamp Duty be Shown on a Mutual Fund Statement?

Yes, the amount of stamp duty deducted will be reflected in your mutual fund statement.

Is the Stamp Duty Deduction a One-time Charge?

Yes, the stamp duty will be deducted only once on a mutual fund transaction.

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I Made a Lumpsum Investment Before 1st July 2020, Will the Stamp Duty be Applicable on This?

No, the stamp duty will not be applicable on the lumpsum investment done before 1st July 2020. It will be applicable only on new investments, switches, dividend reinvestment, SIP triggers which happen after 1st July 2020.

What Will be the Impact on Scheme Returns?

Let us understand the impact based on the below illustration.

Invest amount- INR 1,00,100

Transaction charge – INR 100

Stamp duty on this will be INR 5 (100,100-100) *.005/100.

NAV of this fund is INR 10

Units allotted will be 9999.50 (1,00,100-100-5)/10

No of Days from the Investment DateImpact on Returns in % Terms(Absolute/Day)Impact on Returns in % Terms(Annualized)
10.00501.825000
30.00170.608333
50.00100.365000
70.00070.260714
300.00020.060833
600.00010.030417
900.00010.020278
1800.00000.010139
2700.00000.006759
3650.00000.005000

Key Takeaway

As we can see from the above table, as the time horizon increases stamp duty reduces drastically, the impact on annualized returns reduces from 1.82% if the investment is done only for a day to 0.03% if the investment is done for 60 days. In case the investment is done for a year or 365 days, the impact comes out to 0.005%.

Thus, the impact of stamp duty will be higher on short-term investments in funds like overnight funds where people invest for a day to a week. If your investment horizon is more than 30 days, the impact is minimal. If we were to analyze the impact in terms of asset classes, the impact on equity is very minimal since equity investments are for a longer period. In the case of debt funds also, investments are usually done for more than 30 days where the impact is very low.

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To know more about other mutual fund cost and expenses, you can read another post of ours – https://www.wishfin.com/mutual-fund/what-are-mutual-fund-costs-fees-expenses/

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