New stamp duty turns out to be double tax on fund houses

Suresh P Iyengar Mumbai | Updated on June 30, 2020

The tax will have major impact on short-term mutual fund schemes

The uniform stamp duty of 0.005 per cent on mutual fund investments, which comes into effect from Wednesday, will turn out to be an entry load and double tax on the industry.

The mutual fund industry, which is essentially a pass-through vehicle, was never levied any tax on investment till date.

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 which were earlier being charged at different rates in each State.

The uniform stamp duty was initially to be implemented in January but was postponed to April 1 and then to July 1 due to resistance from lobbying groups. With the Act now coming into force, a stamp duty of 0.005 per cent will be levied on issuance of mutual fund units, switch-in and dividend reinvest, while the levy will be 0.015 per cent for off-market transactions.

The tax will have a major impact on short-term mutual fund schemes, such as overnight and liquid funds, compared to long-term investment in equity. Investors using the monthly systematic investment plan (SIP) route will be most affected as they would have to shell out the new stamp duty on their monthly investment.

G Pradeep Kumar, Chief Executive Officer, Union Asset Management Company, said investors in overnight and liquid funds will be hit the most as they tend to churn their investment in a day or two. Moreover, the returns in these schemes are less compared to that of equity, he added.

Though SIP investors have to pay stamp duty on each instalment, the impact will be negated as they hold on to their investments for two-to-three years.

“The entire stamp duty will turn out to be a double tax on the industry with the levy being collected at the time of investment by the investor and then again when mutual funds deploy these funds in the equity market or debt instruments,” said Kumar.

The mutual fund industry has assets under management of ₹86,664 crore in overnight funds and ₹5.07-lakh crore in liquid funds. The market regulator SEBI and government have been working hard to curb churning of mutual fund investments.

Published on June 30, 2020

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