Mutual Funds

Impact of Stamp Duty on Mutual Fund Investments

Stamp Duty on Mutual Funds: Last year the Government decided to make some amendments in the Stamp Duty Act and they have now introduced an amended stamp duty regime where stamp duty will be levied on issuance, transfer of shares, debentures, futures, currency and other capital market instruments.

This change was first supposed to be implemented by January 9, 2020 which differed to 1st April and then subsequently to 1st July.

Pursuant to Notification No. S.O. 1226(E) and G.S.R. 226(E) dated March 30, 2020, issued by Department of Revenue, Ministry of Finance, Government of India, read with Part I of Chapter IV of Notification dated February 21, 2019, issued by Legislative Department, Ministry of Law and Justice, Government of India on the Finance Act, 2019, stamp duty will be levied on mutual fund transaction, with effect from July 1, 2020, as per the rates provided in the table below in table 1.

Table 1

TypeRevised Stamp Duty Rate
Issue of security0.005%
Transfer of security0.015%

Investors can consider the 0.005% stamp duty similar to an entry load. If you buy mutual funds units for Rs 1,00,000, you will be allotted units for Rs 99,995. The 0.005% stamp duty impact can have a significant impact when you are looking for park funds for less than 5 days. As your investment horizon keeps increasing, the entry load’s impact on your annualized returns will be minimized as explained below in table 2.

Table 2

Investment HorizonStamp DutyAnnualized Impact
1 day0.005%1.825%
3 days0.005%0.608%
5 days0.005%0.365%
7 days0.005%0.261%
10 days0.005%0.183%
15 days0.005%0.122%
30 days0.005%0.061%
60 days0.005%0.030%
90 days0.005%0.020%
180 days0.005%0.010%
365 days0.005%0.005%

Impact on your Mutual Fund Investments

The main impact will be on schemes which promote investments in short term funds, i.e overnight funds, and liquid funds. Overnight Funds and Liquid Funds might not be as lucrative as they have been in the past, however, they can be a much better choice than FDs and we will understand as mentioned in table 3.

Table 3

 Bank FD* (%)Overnight Funds (%)Liquid Funds (%)
7 Days
Stamp Duty (%)0%0.26%0.26%
Net Returns2.75%2.49%3.54%
15 Days
Stamp Duty (%)0%0.12%0.12%
Net Returns2.75%2.63%3.68%
30 Days
Stamp Duty (%)0%0.06%0.06%
Net Returns2.75%2.69%3.74%

*As per Kotak Mahindra Bank FD rates as on 22.6.2020. These rates may vary across banks.

**Based on current YTM’s of various funds

Our View

We still expect stamp duty on mutual funds as a more lucrative option compared to FDs. The fact mutual funds can offer liquidity in T+1 day makes overnight and liquid funds more attractive for corporates and individuals. The minimum time period for FDs are 7 days along with a premature withdrawal penalty which will see FD rates drop from 2.75% to 1.75% (assuming a 1% penalty).

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Team Tarrakki

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