Stamp duty on mutual fund units
Stamp duty on mutual fund units is a statutory charge levied at the time of purchase or switch of mutual fund units in India, introduced by an amendment to the Indian Stamp Act, 1899 through the Finance Act, 2019 and made effective from 1 July 2020. The rate is 0.005 per cent of the investment amount on purchases and on the notional value of units on switches. Stamp duty reduces the number of units allotted to the investor and is credited to the state government of the investor’s registered address.
Unlike the total expense ratio (TER) and exit load, stamp duty is a government levy, not an AMC charge, and cannot be waived or modified by the fund house.
Rate and applicability
| Transaction type | Stamp duty rate | Applicable on |
|---|---|---|
| Purchase (lump sum) | 0.005% | Investment amount |
| Purchase via SIP | 0.005% | Each SIP instalment |
| Purchase via STP (target scheme) | 0.005% | Transfer amount |
| Switch (from one scheme to another) | 0.005% | Redemption NAV × units switched |
| Dividend reinvestment | 0.005% | Dividend amount reinvested |
| Redemption | Nil | Not applicable |
Note: Stamp duty applies on purchase/allotment, not on redemption. Redemption proceeds are not subject to stamp duty (though they may be subject to capital gains tax).
How stamp duty reduces units allotted
Stamp duty is deducted from the investment amount before units are allotted:
\[ \text{Investable amount} = \text{Investment} \times (1 - 0.00005) \]
\[ \text{Units allotted} = \frac{\text{Investable amount}}{\text{Applicable NAV}} \]
For a ₹1,00,000 investment at NAV ₹50:
\[ \text{Investable amount} = 1{,}00{,}000 \times 0.99995 = ₹99{,}995 \]
\[ \text{Units allotted} = \frac{99{,}995}{50} = 1{,}999.9 \text{ units (vs. } 2{,}000 \text{ without stamp duty)} \]
The investor effectively loses 0.1 unit per ₹1,000 invested. On a ₹1 crore SIP portfolio accumulated over years, the drag is ₹500 per ₹1 crore invested, small in absolute terms but permanent and cumulative.
Legal framework
The Indian Stamp Act, 1899 was amended by the Finance Act, 2019 (Section 35) to cover electronic transactions in securities including mutual fund units. Key provisions:
- Section 9A of the Stamp Act (inserted by Finance Act, 2019): Covers stamp duty on issue and transfer of securities.
- Schedule I: Sets the rates, 0.005 per cent for debentures and mutual fund units; 0.015 per cent for transfers.
- The Ministry of Finance issued notification S.O. 1226(E) on 23 March 2020 specifying effective date as 1 July 2020 (deferred from the original 1 April 2020 due to COVID-19 disruptions).
Collection mechanism
The stamp duty is collected by:
- The registrar and transfer agent (RTA, CAMS or KFintech) at the time of unit allotment.
- The RTA remits the collected stamp duty to the State Collecting Agent designated by the relevant state government, based on the investor’s state of residence as per KYC records.
- The AMC does not retain stamp duty, it passes through to the government.
SEBI circular SEBI/HO/IMD/DF2/CIR/P/2020/30 dated 20 February 2020 outlined the operational mechanism for stamp duty collection by market infrastructure intermediaries.
SIP and recurring transactions
For SIP investors, stamp duty is applied on each instalment separately. This does not create a cumulative disadvantage relative to a lump sum, the rate is identical (0.005 per cent per transaction). The key consideration is that over 10–15 years of SIP, thousands of small stamp duty charges are incurred, each reducing units allotted by a minuscule fraction.
For a monthly SIP of ₹10,000, the monthly stamp duty is:
\[ 10{,}000 \times 0.00005 = ₹0.50 \text{ per instalment} \]
Over 10 years (120 instalments): total stamp duty paid ≈ ₹60. At 0.005 per cent, the absolute impact is genuinely small for retail investors.
Comparison with STT on redemption
| Charge | Stage | Rate | Beneficiary |
|---|---|---|---|
| Stamp duty | Purchase | 0.005% | State government |
| STT (equity funds) | Redemption | 0.001% | Central government |
| Exit load | Redemption | 0–1.00% | Scheme (remaining investors) |
| TER | Ongoing (daily) | 0.05–2.25% p.a. | AMC, distributor, expenses |
Stamp duty and STT together represent the transaction cost layer imposed by government, while TER and exit load are scheme-level charges.
Exemptions
The following transactions are exempt from stamp duty:
- Redemption of units (no stamp duty at redemption).
- Transfer of units as a gift (no stamp duty in the mutual fund context, as gifting of MF units requires a separate physical deed process).
- Units issued under bonus/dividend reinvestment where no new money changes hands, though AMFI clarified that dividend reinvestment does attract stamp duty as it represents a new allotment.
Impact on liquid and overnight funds
For liquid funds with very short holding periods (a few days to a few weeks), stamp duty has a proportionally larger impact on annualised returns. A 0.005 per cent stamp duty on a 7-day investment is equivalent to approximately:
\[ 0.00005 \times \frac{365}{7} = 0.26% \text{ per annum} \]
For institutional investors using liquid funds for cash management over very short periods, this is a meaningful cost. SEBI’s graded exit load on liquid funds (effective 2019) and the stamp duty together make ultra-short liquid fund holding periods more costly.
See also
- STT on equity mutual fund redemption
- Exit load in mutual funds
- Total expense ratio
- Capital gains tax in India
- Mutual fund
- SEBI
References
- Finance Act, 2019, Section 35, inserting Section 9A into the Indian Stamp Act, 1899.
- Ministry of Finance notification S.O. 1226(E) dated 23 March 2020, stamp duty rates on securities.
- SEBI circular SEBI/HO/IMD/DF2/CIR/P/2020/30 dated 20 February 2020, operational mechanism for stamp duty.
- AMFI FAQ on stamp duty on mutual fund units, July 2020.
- Indian Stamp Act, 1899, Schedule I (as amended by Finance Act, 2019).