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Stamp Duty on Mutual Funds to Apply From 1 July: What it Means for You
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From 1 July 2020, stamp duty will be imposed on the purchase of mutual funds, including systematic investment plans (SIPs) and systematic transfer plans (STPs), but not on the redemption of units. The duty will apply to all mutual funds—debt as well as equity. However, its impact will be felt the most on debt funds, which are typically held for short periods, as we explain below.

The stamp duty will be imposed at a rate of 0.005% on the purchase or switch-in amount. Apart from this, stamp duty will also be imposed on the transfer of mutual fund units such as transfers between demat accounts at 0.015%. Due to its design, the stamp duty is likely to have the most impact on short holding periods of 90 days or less.

The implementation of the stamp duty was initially slated for January but was postponed first to April and then to July. The stamp duty will apply to all kinds of mutual fund purchases, including lump sum, SIP, STP and dividend reinvestment.

For example, assume your purchase amount is 1 lakh and the transaction charge is 100 making the net purchase cost 1,00,100. The stamp duty will be imposed on 1 lakh and not on 1,00,100. At 0.005% it will come to 5.

Since the duty is imposed on purchase and not redemption, it is akin to an entry load, a note from B&K Securities pointed out. Entry loads on mutual funds were abolished by the Securities and Exchange Board of India (Sebi) in 2009.

B&K Securities laid out an example of stamp duty impact in its research note. Assuming a return of 3.5% on liquid funds, the note showed the return falling to 3.24% for a seven-day holding period. However, for a 30-day holding period, the post stamp duty return comes to 3.44%. For a 90-day holding period it comes to 3.48%, mere two basis points lower than the pre-stamp duty return.

The impact is greater for overnight funds, which are held for very short periods of time. An illustration put out by B&K Securities assuming a 2.70% pre-stamp duty return on such funds saw it falling to 0.87% if the money is held for a single day. For a seven-day period, however, 2.70% fell to 2.44%. Overnight funds have an assets under management (AUM) of 86,664 crores while liquid funds have an AUM of 5.07 lakh crore as of 25 June, the note added.

Retail investors generally invest in liquid funds rather than overnight funds. "The stamp duty impact will be negligible for any holding period more than a month. So apart from your immediate monthly expenses, the case for mutual funds is not affected," said Amol Joshi, founder, Plan Rupee Investment Services.

The Union Budget 2019 made dividends fully taxable at slab rate leading to deduction of Tax Deducted at Source (TDS) on dividend reinvestment on each dividend reinvested. The stamp duty becomes another reason why this option is unattractive, he added.

Source : Live Mint back

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