Impact of Stamp Duty on Mutual Funds' Returns
‘Stamp duty’ - commonly associated with real estate transactions until now - has entered the securities and mutual funds’ lexicon. Effective from July 1, 2020, investors have to pay stamp duty on purchase of units in mutual funds, including through lump sum,
systematic investment plans (SIPs) and systematic transfer plans (STPs). Redemption of units, though, will not attract stamp duty, according to the Securities and Exchange Board of India (SEBI).
- The stamp duty has been extended through an amendment in the Indian Stamp Act, 1899 via Finance Act, 2019
- It requires collection of stamp duty on all securities market instruments, including mutual funds
- Earlier, it was going to be effective from January 2020 but was deferred to April 1. Finally, the government decided to implement it on July 1, 2020 amidst the pandemic
Apart from mutual funds, stamp duty is also applicable on equity, derivatives, and currency trade transactions. For the purpose of this article, we will focus on its impact on the mutual fund investors.
What investors must know about stamp duty on mutual funds
- As per the regulator, stamp duty of 0.005% will be levied on issuance of units, including purchase, switch-in, and dividend reinvestment
- Transfer of units on stock exchanges, for e.g., buying units through a stockbroker, will attract 0.015% stamp duty. Off-market transfer of units, i.e., transfer of units from one demat account to another, will also attract the same rate
- Stamp duty has been imposed on the value of units, excluding other charges, such as service charge, asset management fee, Goods and Services Tax, etc. For dividend reinvestment, stamp duty has been imposed on the dividend amount, after deducting tax at source
- The stamp duty will be auto deducted by the registrar and transfer agent of the mutual fund when investors buy units; they do not have to pay it separately. It will be similar to entry load wherein allocation of the units will be for net amount after deduction of stamp duty. For instance, investment of Rs 10,000 in a mutual fund scheme will attract stamp duty of 0.005%, resulting in Rs 9999.50 invested in the scheme, thereby the investor receiving 99.995 units, if the net asset value (NAV) of the fund is Rs 100, compared with 100 units he would have got before stamp duty was introduced
- The duty will be applicable to all categories of mutual funds — debt as well as equity
Impact of imposition of stamp duty on returns: short vs long term
The impact of levying of the stamp duty on the mutual funds is likely to be negligible for investors parking their money for longer investment horizons. However, it could have an impact on short-term investments. To understand this better, consider the impact of returns over short investment horizons of 7-day and 3-month periods. Investment amount has been assumed at Rs 10 lakh, and returns at 5.21% . The returns are net of expense ratio and for comparison purpose, we assume that there are no exit loads for all the investment horizons analysed.
A quick analysis in the illustration below shows, the impact of stamp duty is highest for 7-day period among the investment periods analysed. The impact reduces progressively as the investment horizon increases with actual return for the investor, just two basis points below the return for the 3-month period compared to 7-days period.
1Average one year returns of CRISIL-ranked liquid funds for the quarter ended June 2020 for period ended July 28, 2020
Impact of stamp duty reduces over longer time horizon of investment
Introduction of stamp duty is expected to have a marginal impact on returns especially in the long term. But investors need to factor in this cost along with other fund-related factors while investing.
Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.