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Does the stamp duty on mutual fund investments affect you significantly?

If you hold your units for a year, the impact is about 0.005%, or in other words negligible.

You’d have seen some emails from your mutual fund AMC regarding stamp duty being imposed on mutual funds. Does this have a significant impact on you?

The short answer

If you hold your units for a month at least, the impact of this is hardly anything that you would notice. Quantitatively this means that for a holding period of a year, the impact goes down to 0.005% (annualised). 

So, what’s this all about?

The Department of Revenue under the Ministry of Finance had notified that from Jul 1, 2020, purchase and transfer of units in a mutual fund (any kind - equity or debt) will attract a stamp duty of 0.005% of the purchase value and 0.15% in case of transfer from one DEMAT account to another. 

Roughly, for an investment value of Rs 1,00,000, Rs 5 will be deducted as Stamp Duty and the rest will be used to buy units in the mutual fund. If you are investing via SIP, say an amount of Rs 10,000 each month, then the duty translates to 50 paise.   

How is it calculated?

If you invest in a mutual fund scheme through lump sum or SIP, the amount will be invested after deducting any transaction charges AND the stamp duty. You didn’t pay any stamp duty earlier but now this is being deducted. Think of it as a nominal entry load.

Roughly, for an investment value of Rs 1,00,000, Rs 5 will be deducted as Stamp Duty and the rest will be used to buy units in the mutual fund. If you are investing via SIP, say an amount of Rs 10,000 each month, then the duty translates to 50 paise.   

Does it impact your growth rate? 

Barely, if you stay invested for at least 30 days. The impact is about 0.005% over a year-long period. For an amount of Rs 10,000, 0.005% translates to about 50 paise. As you can see, the impact is hardly anything to consider, if you intend to stay invested for a year.  The impact is lower the longer you stay invested.

Is there any difference in SIP and one-time investments, with respect to this duty?

No. Each SIP instalment is considered a fresh purchase and attracts a 0.005% stamp duty. One time investments or lump sum investments also attract the 0.005% duty. This is applicable to switch instructions as well when you change funds and move money between funds of the same mutual fund company (AMC).

Do you pay stamp duty when redeeming your mutual fund units? 

No. This duty is chargeable only when buying units. So once the duty has been paid even if the units are received by your nominee through transmission there shouldn’t be any stamp duty requirement.

Do you have to pay the stamp duty separately?

No. The amount is automatically deducted by the AMC when they process your purchase of units. You don’t have to do anything separately.

Does this change how you invest?

We have always recommended staying invested as per your goals requirement. To that end, there is hardly any investment goal that would require you to invest for anything less than 30 days or rather a year at least. Your bank account is a better option for requirements within 30 days. As mentioned above, that is the only case (investing for less than 30 days) where this has a slight impact. 

Overall, considering the tiny percentage change (even taking into account compounding), this shouldn’t change how you approach your goals and invest as long as they are aligned to what makes sense depending on your requirements.

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