Mutual Funds Purchase Now Come With Stamp Duty

Updated on: Jan 7th, 2022 - 2:50:47 AM

4 min read

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If you are an active mutual fund inverter, then here’s something that you should always keep in mind going forward. Mutual fund purchases now come with stamp duty charges. We have covered the following in this article:

What is Stamp Duty?

Stamp duty is a form of tax levied on the purchase or sale of an asset or security. You might be aware that the purchase of real estate properties entails you to pay stamp duty at a particular rate, depending on the jurisdiction. Similarly, the government has decided to impose stamp duty on investors when they purchase mutual fund units.

Applicability of Stamp Duty

The purchase of any mutual fund made through any of the following modes now attract stamp duty:

  • SIPs (Systematic Investment Plans)
  • A one-time lump sum
  • STPs (Systematic Transfer Plans)
  • Dividend reinvestment option

How Much is the Stamp Duty?

Investors need not worry about having to feel the pinch of paying stamp duty charges. It is collected at a meagre rate of 0.005% of the overall purchase made and is effective from 1 July 2020 as per the government’s order. This is a very nominal amount and is collected only at the time of purchase of fund units. The stamp duty charges are not restricted to only purchase.

It is levied on the transfer of fund units between Demat accounts as well. In this case, the stamp duty charges are a little higher than the purchase transaction. It is imposed at a rate of 0.015%. Rest assured, this charge is very insignificant and is easily masked the potentially high returns.

How is Stamp Duty Collected?

When you purchase units of a mutual fund plan, you will have to pay stamp duty charges on the units allotted, and it is in addition to the applicable charges such as the platform fee (if you invest through a particular site, then they may charge a sum), service charge, GST, and transaction charges. In the case of dividend reinvestment plans, stamp duty will be levied on the dividend amount post deducting TDS (tax deducted at source), if applicable.

Note that in dividend reinvestment plans, the dividends are not handed out to you. Instead, they are reinvested in the scheme, and you will be allotted with new fund units.

Impact of Stamp Duty on You

Do not worry about having to pay the stamp duty on purchasing mutual fund units. A charge of as low as 0.005% is negligible. This should in no way hold you back from making mutual fund investments. Here’s an example on the application of stamp duty on mutual funds: Imagine you invest Rs 1 lakh in a mutual fund scheme. The stamp duty is charged at 0.005% as per the government’s order.

Therefore, in this case, you will be charged a sum equivalent to 0.005% of Rs 1 lakh towards stamp duty.

Stamp duty = 0.005 x 1,00,000 = Rs 5

Amount invested after deducting stamp duty = Rs 1,00,000 – Rs 5 = Rs 99,995

Therefore, you will be allocated with fund units corresponding to the amount you are going to invest. In this case, you will be allotted with the funs equivalent to Rs 99,995. However, if there are any charges such as the platform fee, then your investible amount (post deducting stamp duty) will be further reduced by that amount.

Other Charges Related to Mutual Funds

The imposition of stamp duty can be considered as an entry load. Now, the investors have to pay expense ratio, the transaction fee (is investing through a platform which charges), securities transaction tax (STT) in the case of equity funds, exit load (if any), and stamp duty for their mutual fund investment. Remember, all these charges are insignificant in front of the potentially high returns provided by the mutual funds.

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