Stamp duty on mutual funds: Why it is important to know about it

Investing in mutual funds can be a suitable way to grow wealth over time. However, before investing, it is essential to understand all the associated charges, including stamp duty. Stamp duty on mutual funds is a mandatory charge levied by the government on the transfer of securities. While it may seem like a minor cost, it can impact the overall returns on investments.

In this article, we will explain stamp duty on mutual funds in detail, covering its meaning, applicable rates, charges and how it affects investors. Understanding these aspects will help investors make informed decisions and plan their investments more effectively.

• Table of contents

• Understanding stamp duty on mutual funds
• Rates of stamp duty on mutual funds
• Stamp Duty Applicability
• IDCW reinvestment plans
• Charges for mutual funds
• Impact of stamp duty on mutual funds on investors

Understanding stamp duty on mutual funds

Since July 2020, a stamp duty of 0.005% applies to all mutual fund transactions, covering new investments in equity, debt funds and exchange-traded funds (ETFs). This applies regardless of the investment mode—SIPs, STPs, demat or physical transactions.

Stamp duty is charged only on the purchase of new mutual fund units and does not apply to sales or redemptions. It is calculated on the investment amount, excluding any other charges.

For mutual fund unit transfers between demat accounts, a higher stamp duty of 0.015% is applicable.

For example, if you invest Rs. 1 lakh, the applicable stamp duty will be 0.005% of Rs. 1 lakh, which amounts to Rs. 5.

This means your effective investment will be:

Rs. 1 lakh – Rs. 5 = Rs. 99,995.

Read Also: What is a mutual fund: Meaning, types, and benefits

Rates of stamp duty on mutual funds

For mutual fund purchases: 0.005% on the purchase value of mutual fund units.

For mutual fund transfers: 0.015% on the transfer value in cases where mutual fund units are transferred without consideration (such as gifts or off-market transactions).

These charges are minimal but can still impact investment returns, especially for large-scale investments.

How is stamp duty calculated on mutual funds?

Stamp duty on mutual funds is charged on the value of units issued to investors, not on the market value of the scheme’s portfolio. The duty applies to both lumpsum and SIP transactions, including switches treated as fresh purchases. It is not charged on redemptions.

Stamp duty is calculated at 0.005% on the purchase value of mutual fund units. This charge is added to the investment amount, which means the number of units allotted becomes slightly lower. For example, if an investor invests ₹1,00,000 in any mutual fund scheme, stamp duty of ₹5 is deducted, and units are allotted for ₹99,995. This applies uniformly across equity, hybrid, debt, and fund-of-funds categories.

Stamp duty applicability

• Applicable on purchase, SIP instalments, switch-ins, and IDCW reinvestments.
• Not applicable on redemption or transfers without consideration.
• Charged at 0.005% on the value of units issued.
• Applied uniformly across all mutual fund categories.

IDCW reinvestment (formerly dividend reinvestment plans)

Many investors opt for dividend reinvestment plans where their earned dividends are used to purchase additional mutual fund units. In such cases, stamp duty is also applicable at the rate of 0.005% on the reinvested amount.

Charges for mutual funds

• Expense Ratio: An annual fee (as a % of daily net assets) covering fund management, admin, and marketing costs. A higher ratio lowers returns. Example: 1.5% on Rs. 1.80 lakh = Rs. 2,700/year.
• Entry Load: Previously charged at investment entry but abolished by SEBI in 2009 for transparency.
• Transaction Charges: Levied on purchases/sales above Rs. 10,000 (Rs. 150 for new, Rs. 100 for existing investors).
• Exit Load: Fee for early redemption (usually 1%). Example: 1% on Rs. 50,000 = Rs. 500. Some funds waive this charge.

Read Also: What are mutual fund units?

Impact of stamp duty on mutual funds on investors

Stamp duty may slightly reduce your initial investment, but don’t worry—it won’t impact your overall strategy. The long-term growth of mutual funds usually outweighs this small cost.

Example:

If you invest Rs. 10 lakh in a mutual fund with a NAV of Rs. 10, a 0.005% stamp duty means you’ll pay Rs. 50. Your actual investment will be Rs. 9,99,950, so instead of 1 lakh units, you’ll get 99,995 units. A small price for seamless investing!

Conclusion

Stamp duty on mutual funds is a small but important charge that affects the cost of investment. It is a one-time deduction applied when mutual fund units are purchased or transferred, ensuring a uniform taxation policy. While the impact on returns is minimal, understanding these charges helps investors plan their portfolios more effectively.

Being aware of all associated costs, including expense ratios, exit loads and transaction charges, allows investors to make well-informed financial decisions. By considering these factors, one can optimize returns and avoid unexpected deductions on their investments.

FAQs:

What is stamp duty on investment?

Stamp duty on investment is a government-imposed charge on the purchase and transfer of securities, including mutual funds, to ensure legal documentation and uniform taxation.

What are the stamp duty charges on SIP investments?

Stamp duty on SIP investments is 0.005% of the invested amount and is deducted before the mutual fund units are allotted.

Who pays stamp duty in India?

The investor purchasing or receiving the mutual fund units pays the stamp duty, which is deducted at the time of unit allocation.

What is the tax on mutual funds?

Mutual fund taxation depends on the type of fund and holding period. Equity funds attract short-term capital gains tax (STCG) at 20% and long-term capital gains tax (LTCG) at 12.5% on gains above Rs. 1.25 lakh. Capital gains on debt funds are taxed as per the investor’s prevailing income tax slab.

Is stamp duty included in the cost of investment?

Yes, stamp duty is deducted at the time of unit allotment, reducing the total investment value slightly. However, it is not considered part of the expense ratio or fund management charges.

Is stamp duty applicable on redemptions or switch-outs?

Stamp duty is not charged on redemptions or switch-outs because it applies only at the time of mutual fund unit issuance.

Does stamp duty apply to units held in physical mode?

Yes, stamp duty applies regardless of whether units are held in physical or electronic form. Holding format does not affect applicability because the levy is linked to purchase activity rather than storage or record-keeping method.

Is stamp duty charged retrospectively on past SIPs?

Stamp duty is not applied retrospectively. It is charged only on SIP instalments processed after the implementation date of the rule. Earlier purchases remain unaffected. Each new instalment is treated as a new purchase, and the applicable duty is deducted from the investment amount at the time of execution.

How is stamp duty calculated for IDCW reinvestment plans?

For IDCW reinvestment options, stamp duty applies when new units are issued using the IDCW payout amount. The duty is calculated on the reinvested amount at the prescribed rate before unit allocation. Although investors are not making a fresh payment, unit issuance still triggers duty applicability under the regulations.

Does transferring mutual fund units between Demat accounts attract stamp duty?

For mutual fund unit transfers between demat accounts, a higher stamp duty of 0.015% is applicable.

Are there any situations where stamp duty is not applicable?

Stamp duty is not applicable on redemptions or switch-outs. It also does not apply to past transactions completed before the implementation date.