Regulatory Watch. How stamp duty will impact your MF investments

With effect from July 1, stamp duty is applicable on mutual fund (MF) purchases and on transfer of MF units.

This includes lump-sum investments, systematic investments (SIP), systematic transfers (STP), switch-in of units, dividend reinvestment of units, buying exchange-traded funds (ETFs) and close-ended schemes units on stock exchange, and transfer of units from one demat account to another demat account.

Note that this does not apply to existing units that you have already bought.

The applicable stamp duty rate is 0.005 per cent on purchase and switch-in of units, STP/SIP and dividend reinvestment of units; and 0.015 per cent on transfer of units and buying of units on stock exchanges. The stamp duty will be charged on the net investment value.

While the impact of stamp duty on long-term investments will be negligible, it would pinch investors parking large sums of money for very short period of time, say in liquid or overnight funds.

Applicable schemes

Stamp duty is imposed on all mutual fund schemes, including equity, debt, hybrid, index funds and ETFs. All direct and regular plans that are held in physical as well as demat mode are included. It will also be applicable on all running SIP/STPs that were registered earlier. Every instalment post-July will now have stamp duty on it.

Note that stamp duty is applicable on switching the units within the same scheme, too (for example, from growth plan to dividend plan or vice-versa). In the case of dividend reinvestment option, stamp duty is deducted on dividend amount (less applicable TDS, if any) and then the units will be created for the balance amount.

However, stamp duty is not applicable while selling/redeeming mutual fund units. Also, stamp duty is not applicable on transactions related to switch-out, dividend payout, systematic withdrawals (SWP) and the units that are transferred to claimants as a result of transmission of units.

As the stamp duty is already deducted at the time of issuance of units, the same is not applicable on conversion of units from physical mode to demat mode.

It will be auto-deducted by the registrar and transfer (R&T) agent of the mutual fund when you buy the units.

In the case of ETFs, stamp duty will be levied on the transaction amount by the stock exchanges.

How it is charged

The stamp duty will be calculated on the net investment amount, ie, gross investment less any transaction charge.

Hence, for a purchase amount of ₹1 lakh, the stamp duty at 0.005 per cent will work out to ₹5.

This will be deducted from the amount invested and you will be allotted units for invested amount of ₹99,995.

The applicable duty on buying ETFs units and units of close-ended schemes (including fixed maturity plans (FMPs)) on exchanges and the transfers between demat accounts is 0.015 per cent, which works out to ₹15 for every ₹1 lakh of investment (net).

Please note, if you buy ETF units through the exchanges, the applicable stamp duty is 0.015 per cent.

But if you buy ETF units from an AMC, (normally AMC allows in lots with big ticket size), the applicable duty is 0.005 per cent.

Impact on investments

The stamp duty amount is minimal and is a one-time payment made at the time of investment.

But if you have a very short-term horizon and park money in, say, liquid funds, for less than a month, the imposition of stamp duty can pinch you hard.

Let us assume you have invested ₹1 lakh in a fund which generates an annualised return of 3 per cent.

If your holding period is just one day, your return (annualised) actually shrinks to just 1.2 per cent due to the stamp duty.

As the holding period increases, the impact is much lower. For instance, your annualised return will be 2.4 per cent if you hold for three days and 2.9 per cent if it is 15 days.

If you hold the fund for a month, the impact of stamp duty is almost nil; you get 2.94 per cent return.

This is similar in the case of ETF investment, too (see table).

In short, institutions that park large sums of money in overnight and liquid fundsduring weekends to earn extra returns will be hit hard as they can lose up to 60 bps (annualised) in returns due to the imposition of stamp duty (investment held for three days).

Traders parking money in liquid ETFs will also feel the heat.

However, the impact of stamp duty would be negligible on most retail investors as they prefer holding mutual funds for the long term.

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