Stamp Duty to be levied on Mutual funds from July 1, 2020

Introduction

Stamp duty is the duty governments place on authoritative archives, ordinarily in the exchange of benefits or property. Governments force stamp obligations, otherwise called stamp charges, on archives that are expected to legitimately record specific sorts of exchanges. The Indian Stamp Act, demands stamp obligation on the Instrument and not on exchanges and this reality has been maintained by numerous courts.

The legislature had acquainted changes with the Stamp obligation Act by presenting a uniform pace of stamp obligation on exchanging of offers and products. From first July 2020, all offers and shared reserve buys will pull in a stamp obligation of 0.005% and any exchange of security (MF units) will draw in a stamp obligation of 0.015%. This will be material for methodical venture plans (SIPs) and orderly exchange plans (STPs). Be that as it may, recovery of common subsidizes won't go under this.

This duty will apply to all mutual funds – debt as well as equity, effectively acting as an entry load as allocation of units will be at net amount post deduction of stamp duty.

Transactions which will attract 0.005% stamp duty are:-

1. Purchase of units
2. Switch-in of units
3. Systematic Investment or Transfer installments (SIP/STP).
4. Dividend Reinvestment of Units.

Transactions which will attract 0.015% stamp duty are:-

1. Buying units on stock exchange through a stock-broker e.g. ETF, closed ended schemes.
2. Off-market transfer of units i.e. transfer of units from one demat account to another demat account.

The stamp duty will be auto-deducted

As and when one buys a shared reserve, the stamp obligation will be auto-deducted by the recorder and the exchange operator. One doesn't need to pay for it independently. Acquisition of the unit will occur in the wake of deducting the stamp obligation sum.

Stamp duty to mainly affect short term investments

The impact on long-term investments by retail investor is nominal. The lower the holding period of investments, the higher will be the impact. The move could impact large institutional investors who mostly put their money in liquid schemes for shorter time periods. Many corporate treasuries deploy money for a short period of time as they need it for working capital requirements.

Let us refer to the table given below to understand the same:-

Thus, the impact is higher for investors with short-term investment horizon such as banks and corporates who invest in liquid and overnight schemes of mutual funds. It will have negative impact on the institutional clients who park their short term money in liquid or overnight funds. Decreasing yields and additional expense of stamp duty will have negative impact on the overnight/liquid category.

How would the stamp duty impact retail mutual fund investors?

Investors investing a few lakh rupees will have little to no impact on their investments. However, corporate investors investing several crores and also investing for a few days to a month in categories such as overnight funds may see some impact.

Hence, for corporates or Institutional investors, it does impact their returns but for retail investors, it is not a big pinch to the finances.

The stamp duty imposition will encourage investors to stay invested for a longer duration and not churn portfolio for higher yields as Investors in overnight/ liquid fund category with investment horizon of 7 days and below will have negative impact due to stamp duty levied.