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Understanding Stamp duty for Mutual Fund Investors

Stamp duty on mutual funds and other charges giving you sleepless night? Read here to know everything about stamp duty on mutual funds and other mutual funds related charges

If you have been planning to invest in mutual funds, know that the mutual funds come with stamp duty charges. While the stamp duty tax is usually related to and levied on property and other asset selling, the central government has also introduced stamp duty to mutual funds. It's a relatively newer addition to mutual funds. That is the reason many investors are still aware of this concept. 

So what is stamp duty on mutual funds

Stamp duty is basically a tax applied on the purchase and sale of any asset. In mutual funds, the fund units are considered an asset. But instead of selling the fund units, the stamp duty tax is applied on fund unit purchasing. Stamp duty can also be considered the entry load.

How does stamp duty get applied to mutual funds?

The stamp duty is applied on all mutual fund modes mentioned below for all investment types, schemes, and plans.

  • Lump sum investment
  • Systematic investment plan (SIP)
  • Dividend reinvestment plan 
  • Systematic transfer plan (STP)

How much is the stamp duty on mutual funds? 

According to the current SEBI laws, mutual fund houses charge .005% as stamp duty from investors on purchasing fund units. It's a one-time charge but will be applied every time you purchase units. 

Stamp duty is also applicable in case of transfer of units such as from one Demat account to another, off makers transfer, etc. The applicable rate for the same is .015% as charged by depositories. 

How are stamp duty charges collected? 

When an investor purchases the units of a mutual fund, stamp duty gets auto-deducted by the transfer agent or registrar. For dividend reinvestment funds, stamp duty is charged on the dividend amount after deducting the applicable TDS (at source).  

Impact of stamp duty on investors 

The .005% charges may seem insignificant in contrast to the amount invested but still can impact your returns based on your investment amount and for what time horizon. 

  • Effect of time horizon: For a short holding period, the impact of the stamp duty can be more. Let's understand with an example. Assume you invest Rs 2 lakhs in a mutual fund and hold for a week. Here a stamp duty charge of Rs 70 (Rs 2 lakh x .005% x 7) will be deducted at the end of your holding period. So, the per day charge will be Rs 10. But, if you hold your units for a year (365 days), your stamp charge will be approximately 10/365 = .027 per day. So, the short-term time frame investors select, the higher the stamp charges and the higher it will impact the returns. 
  • Effect of investment amount: The stamp duty charges are more for large investments. For example, if you invest Rs 10 lakhs in a fund, the stamp charges are Rs 50, but for an investment of Rs 10000 for the same period, it will be Rs .5. 

From the above, we can conclude that it doesn't matter whether you have a large or small investment amount, but if you have a long-term investment horizon, these stamp duty charges will not likely have a meaningful impact on your investment. 

Other charges or expenses that come with mutual funds 

Apart from stamp duty on mutual funds, there is also a cost attached to mutual fund management which has to be paid by the investors as part of their investment in mutual funds. From AMC to fund managers and a team of experts and analysts, mutual funds need a host of industry experience and expertise to make it a success for investors. All of these come with charges or operational costs that come under one name called the expense ratio. 

The expense ratio covers various mutual funds charges that are one-time or recurring, such as 

One-time charges

The investors incur during the initial period of investment 

  • Entry load: A fee investors pay during the purchase of units. However, not all mutual funds ask for it. 
  • Exit load: A fee investors pay when they redeem their mutual fund units. When an investor redeems his fund units within the lock-in period, they get levied with an exit charge. It is usually between .25% to 4% for each fund unit that an investor redeems. No exit charges are applicable if an investor redeems units after the lock-in period. 

Recurring charges

The investors pay on a daily, monthly, or annual basis hence also called a period fee. It includes fees related to portfolio management, marketing & other services. 

  • Portfolio management: This fee is charged by AMC to fund managers for managing investors' investments.
  • Account fee: In some cases, AMCs charge this fee to investors if they fail to maintain their account balance. This fee gets deducted from the investor's portfolio. 
  • Distribution and marketing fee: It's a fee charged by AMC for advertising, marketing, and mailing purposes and to keep investors informed about various fund schemes. 
  • Fund switch fee: Some funds allow switching facilities to investors for transferring investments from one fund scheme to another. For this, investors have to pay a switch price. 

The investors incur expense charges on mutual funds depending on the investment plan they have opted for. There are two ways to enter into mutual fund investment: the direct investment plan and the regular plan. In a direct investment plan, investors can directly buy fund units through AMCs. This plan is considered cost-efficient as investors save a considerable amount of commission that one needs to pay to an agent or distributor. However, managing funds for yourself isn't easy. It requires significant time, effort, and expertise to research & understand the various mutual fund schemes, the market & workings and to translate them all in line with your investment needs. That is when a regular plan comes into play. 

When mutual funds are purchased through an intermediary platform, the way is called a regular plan. Direct and Regular investment plans are managed by the same fund manager and have the same mutual fund schemes and portfolios but have different expense ratios. The regular plans have a higher expense ratio because of fees that inventors pay to agents or distributors for the expertise and many other benefits & convenience that come along. 

Things to remember relating to stamp duty on mutual funds 

It's essential to understand the applicability of expenses (in this case, stamp duty on mutual funds) that come with it if you want to make the most of your investments. Having authentic information at your side saves you from the hassle of enquiring from different sources and getting misled. It also saves you the money that otherwise you would pay extra in case of wrong or no information about certain things. So here's sharing some of the points you must remember when paying stamp duty. 

  • Stamp duty in mutual funds applies only to the purchase of units, not on selling. Also, when the fund units get transferred from one Demat account to another and 
  • It is charged at a standard rate of 0.005 of the total value of the purchased units. 
  • It applies to all types of mutual funds (equity, debt, etc.), irrespective of whether you are going for a short or long-term investment. 
  • Stamp duty is inclusive of the purchase and not paid by investors separately. 
  • The stamp duty amount gets deducted before the units allotted to investors.
  • Stamp duty doesn't include GST and other expenses associated with mutual fund portfolio management. 

Conclusion

Stamp duty charges may seem intimidating. But when you consider earning potential from mutual funds, this additional charge appears negligible. While you cannot lessen stamp duty on mutual funds, you should look for ways to maximize your return on investment. Look for the track record of your fund and AMC, consistency of their returns, their expense ratio (the lower, the better), and more. Analyze your options well while selecting any mutual fund schemes.

FAQs

Have you got any queries? Check out this FAQ section. 

Will I get a deduction on stamp duty while computing tax for capital gain?

Yes, you can count stamp duty as expenses in this case. 

Is stamp duty applicable on fund unit redemption?

No. Stamp duty is only applicable on purchasing fund units. 

What charges does stamp duty not include?

Stamp duty charges are applied only on fund unit purchasing. It doesn't include GST, service, transactions, AMC fees, etc.  

How do you calculate stamp duty charges for an investment?

Stamp duty is applied at a rate of .005%. So if the fund units get issued for an investment of Rs 1 lakh in a scheme, you pay Rs 5 as stamp duty. 

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