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What is Stamp Duty

01 Jun 2023

For most investors, mutual funds are a safe haven. One of the most popular ways of investing, mutual funds are carefully selected clusters of stocks and securities that help you grow your savings. While mutual funds investments are quite simple and easy to understand, there are certain aspects that most investors are unaware of. When investing your hard-earned money in any kind of investment tool, it is important to understand the nitty-gritty, so that when it comes to evaluating the returns, there are no surprises. One such aspect is the stamp duty on mutual funds. 

Surprised? Well, just like there is a stamp duty when you buy a house/ property, there are certain stamp duty charges on mutual funds as well. Read on to understand what is stamp duty on mutual funds, and its impact on you as an investor. 

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What is Stamp Duty on Mutual Funds?

A kind of entry load or an entry fee, stamp duty charges are one-time charges that are levied on the purchase of mutual funds units. Imposed by the Government of India, stamp duty is applicable in the following cases:

  1. When lum-sum investments are made in debt funds and equity funds,
  2. SIPs, Systematic Investments Plans,
  3. STPs, Systematic Transfer Plans,
  4. Dividend reinvestment transactions/ Dividend transfer/ Sweep transactions, and
  5. Transfer of units from one demat account to another.

Latest Update on Stamp Duty on Mutual Funds

With effect, from July 1st, 2020, Stamp Duty would be charged when you purchase mutual funds. This includes SIPs, as well as STPs. The stamp duty will be levied on equity mutual funds and debt mutual funds. It should be noted that the redemption of units, dividend pay-outs, and STP switch-out will not attract any stamp duty. Stamp duty would also not be applicable when there is a transfer of units from the Broker account to an investment account.

A charge of 0.005% will be imposed at the time of making a purchase or a switch in. There will also be a 0.015 per cent stamp duty when there is the transfer of mutual funds units between demat accounts. In this way, stamp duty charges would thus impact short holding periods that are of 90 days or fewer. Let us further understand the stamp duty on mutual funds with this example:

Investor Ravi Nair purchased mutual funds worth INR 2 lakhs. He paid a transaction charge of INR 200, which made the total cost of the purchase to be INR 2,00,200. The stamp duty would only be charged on the INR 2 lakh and not the net purchase cost. Therefore, the stamp duty paid by Ravi would be INR 10. 

Will the Stamp Duty on Mutual Funds Affect the Investor?

The term stamp duty charges may make you a little wary or apprehensive about mutual funds. However, unlike real estate, the stamp duty in the case of mutual funds is quite nominal. The rate of 0.005% is negligible, and would not affect your budget much. Also, keep in mind that only when the investment is for more than a year would the full effect of the charges come into play. Thus, this onetime fee would not be very high. 

How do I pay the Stamp Duty on Mutual Funds?

At the time of purchase, you would be charged the stamp duty on the units that you have been allocated. The other charges, such as GST, service charges and other transaction charges, will be levied as applicable. However, in the case of dividend reinvestment, the duty will be applied to the dividend after the TDS is deducted, if it is applicable. 

Stamp duty is a minor charge that you have to pay at the time of starting your investment journey. Do not let it be any reason for not investing in mutual funds. The charge of 0.005% or 0.015% is quite insignificant, which would be covered very easily with the high returns that you would likely receive. 

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