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Stamp Duty on Mutual Funds: How will it impact investors?

From 1st July 2020, Stamp Duty @0.005% will be levied on purchase of Mutual Funds and @0.015% on transfer of Mutual Funds. In simple words while buying mutual funds we will be paying a duty of 0.005% and while transferring them from one Dmat to other Dmat account the duty will be 0.015%.

What does it mean and how will it impact investors?

Actually the stamp duty amount is not much and should not affect your investment choices.

Still its always good to understand and be aware of even small costs of our investments. Lets just discuss everything about the Stamp Duty on Mutual Funds.

Stamp Duty on All types of Mutual Funds

Firstly stamp duty is applicable on all types of Mutual Funds; be it a long term lump sum mutual fund or an SIP or a dividend reinvestment plan or others.
No Stamp Duty on Redemption

There is no stamp Duty at the time of redemption of your Mutul Fund. So no stamp duty at the time when you redeem your fund.

Stamp Duty only on purchase & transfer

Stamp Duty is only at the time of buying of mutual fund or at the time of transfer of a mutual fund. Everytime we buy a mutual fund duty @.005% will be levied. And if there is a transfer of Mutual Fund it will be .015%

Stamp Duty
charge is not much

Technically impact of Stamp Duty will be very low to be felt by buyers.
For Example:
    • If I buy a monthly SIP of 10,000, I will be paying just 50 paise per month as stamp duty for my buying the SIP.  For the 12 months of a monthly SIP of 10,000, stamp duty will be just   6.00.
    • Similarly for a lumpsum investment of 1,00,000 in Mutual Funds the stamp duty will be just 5.00
Dividend part of Dividend Reinvestment Plan will attract Stamp Duty

Stamp Duty will be charged on the dividend part of dividend reinvestment plans, as the dividend is invested in buying additional units of the mutual fund.
Total Amount of Stamp Duty will become more for short term holdings

Stamp duty cost will be more for the investors who trade in mutual funds. Investors who buy & redeem mutual funds frequently say in 15 days or so, the cost will increase as the stamp duty is charged everytime you buy a mutual fund. So for 1,00,000 mutual fund traded 24 times in an year stamp duty cost of 5.00 will be multiplied 24 times and will become 120 for the year.

Impact of Stamp Duty will be felt by large investors who invest large sums for a day or two. Basically return of corporate investors will be affected. For an investment of
1.00 Cr in mutual fund held overnight earning a days return of 1700 (6% annual) the stamp duty cost of 500 (.005% of 1.00 cr) will result in a decline of around 29% of its days return. This Impact however will be reduced with increase in holding period. 
In a nut shell decisions of Mututal Fund Investments for a long term should not have any fear of stamp duty. For short term investors its better to evaluate the impact and accordingly decide the holding period of investment.

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