Stamp duty is a small, one-time fee you pay when you buy mutual fund units. Its impact is smaller the longer you hold your investment. However, for short-term investments, the impact is relatively higher. The stamp duty rate is 0.005% of the purchase value, which is a very small amount.
All regular investors in mutual funds are now aware of the concept of stamp duty on mutual funds and this is levied when mutual funds are acquired or transferred. Stamp duty like other government-imposed taxes is a tax on any transaction that generates money. Similarly, stamp duty in mutual fund is charged by the Central government on investments in any mutual fund scheme.
What is Stamp Duty on Mutual Funds?
The stamp duty on mutual funds is payable when any fund’s units are purchased or transferred or when assets or securities exchange hands. For instance, in a real estate purchase, stamp duty is fixed. In the case of mutual funds, the stamp duty deduction reflects in the investor’s bank statement as well.
Since July 2020, a stamp duty of 0.005 percent is applied to all mutual fund purchases, including investments in equity funds, debt funds, and ETFs. This charge applies across all modes—SIPs, STPs, demat transactions, and physical purchases.
Stamp duty is levied only on the purchase of new mutual fund units and does not apply to redemptions or switches. It is calculated solely on the investment amount, excluding any additional fees or charges.
For transfers of mutual fund units between demat accounts, a higher stamp duty rate of 0.015 percent is applicable.
For instance, if you invest Rs. 1 lakh, the stamp duty will be 0.005 percent of the invested amount, which comes to Rs. 5.
So, your actual investment value becomes:
Rs. 1,00,000 – Rs. 5 = Rs. 99,995.
Applicability of stamp duty on mutual funds
Before July 2020, stamp duty was not charged on mutual fund transactions. After the rule change, stamp duty is now applicable on the purchase of mutual fund units through various modes, including:
- Systematic Transfer Plans (STPs)
- Dividend reinvestment options
- Systematic Investment Plans (SIPs)
- One-time lump sum investments
Stamp duty is charged only when new units are issued and not on redemptions or switches.
Rates of Stamp Duty on Mutual Funds
Prior to July 2020, there was no mutual fund stamp duty. However, it has become applicable on options for dividend reinvestment, Systematic Transfer Plans (STPs), one-time lump sum investments, and Systematic Investment Plans (SIPs).
The stamp duty on mutual funds is at 0.005% on the mutual fund’s net purchase amount that the investors pays when buying a mutual fund’s units and transferred to his Demat account. It also applies on a transfer of units of a fund between two Demat accounts and the rate is 0.015%. However, no stamp duty in mutual fund is levied when the units of a scheme are redeemed.
Furthermore, when investments are made in a new mutual fund with fresh units being issued, the stamp duty is exclusive of other charges like GST, AMC fee, transaction charge and service charge.
Dividend reinvestment plans
In the case of dividend reinvestment plans, stamp duty is applicable on the amount of dividend earned after deducting TDS or tax deducted at source. In a DRI plan, the investor does not receive the dividend in hand; rather, it is ploughed back into the said scheme with fresh units being issued.
Charges for Mutual Funds
- Expense ratio:
This is an annual fee charged as a percentage of the fund’s daily net assets. It covers fund management, administrative, and marketing expenses. A higher expense ratio reduces your net returns.
Example: A 1.5% expense ratio on Rs. 1.80 lakh equals Rs. 2,700 per year. - Entry load:
This was a charge applied when investors bought mutual fund units. SEBI abolished entry loads in 2009 to improve transparency. - Transaction charges:
These charges apply to purchases above Rs. 10,000. New investors may be charged Rs. 150, while existing investors may be charged Rs. 100. - Exit load:
This is a fee charged for early redemption, usually around 1%.
Example: A 1% exit load on Rs. 50,000 results in a Rs. 500 charge. Some funds do not levy an exit load.
How does stamp duty on mutual funds work?
When you purchase mutual fund units, stamp duty is applied based on the value of the units being allotted. This charge is separate from other applicable costs such as service charges, platform fees, transaction charges, and GST.
In dividend reinvestment plans, stamp duty is charged on the reinvested dividend amount after TDS, since new units are issued under the scheme.
If mutual fund units or Alternative Investment Fund (AIF) units are transferred in physical form to another person, the stamp duty is collected from the transferor.
Impact of Stamp Duty on Mutual Funds on Investors
The one-time charge of 0.005% has an impact on long-term holdings; however, it is relatively higher on short-term holdings. Moreover, fund switching within one month results in 0.01% stamp duty, which is double the current rate and reduces returns significantly. Additionally, a redemption within a 30-day period of an investment has the maximum impact.
Conclusion
Stamp duty on mutual funds is a minor yet noteworthy cost that investors should be aware of. It is applied once—either when new units are purchased or when units are transferred—ensuring consistency in taxation across transactions. Although the impact on overall returns is small, understanding how it works helps investors plan more efficiently.
Knowing all related charges, such as expense ratios, exit loads, and transaction fees, enables investors to make informed choices. By keeping these costs in mind, you can better optimise your returns and avoid unexpected deductions from your investments.
If you are an investor and want to start your investment journey, you may visit the Bajaj Finserv Mutual Fund platform to learn more about mutual funds and SIPs. Feel free to make use of their Lumpsum calculator and SIP calculator to calculate your financial goals better.
