The Government of India has brought into effect certain amendments to the Indian Stamp Act as part of the Finance Act 2019.
Originally the plan was to be executed from January 9, 2020
which was then postponed to April 2020 and then eventually it came into effect
from July 1, 2020.
In simple terms it means that a stamp duty of 0.005% will be
deducted on the investment amount of mutual funds for any transaction executed
on or after July 1 2020.
This would be applicable on:
- Purchases
- Dividend Reinvestments
- Systematic Investment Plan (Inclusive of Live SIP’s)
- Systematic Transfer Plan
- Equity as well as Debt schemes
A simple illustration to understand this better
Application Amount: 1,00,000
Stamp Duty: 0.005%
Stamp Duty Amount: 1,00,000 X 0.005% =Rs 5
Net Investment Amount (After deducting Stamp Duty) =
9,99,995
As can be seen by the above illustration, if you have a long
term horizon then there’s not much to lose sleep over.
Below are some queries addressed in relation to this new
rule affecting mutual funds.
Will this be applicable on running/old mutual fund sips?
Yes but only for instalments on and after 1st July 2020, meaning let’s say your mutual fund SIP began from 05th January 2020 then stamp duty will be applicable from 05th July 2020.
This will be applicable for each SIP instalment and not just
for the one being deducted during July 2020.
What about Lumpsum
investments?
As explained in the illustration above, stamp duty will be deducted
only once for lumpsum investments in mutual funds.
Is this new rule applicable
only for equity mutual funds or even debt mutual funds?
This new rule is applicable on all categories of mutual
funds so yes, even debt mutual funds.
How does the new rule apply
to Systematic Transfer Plans?
In this case the stamp duty will be deducted both when you
invest into the debt fund/liquid fund as well as when the STP begins into the
principal fund (for each instalment).
Let’s understand this better with an illustration:
|
Amount to be invested |
1,00,000 |
|
No of instalments |
10 |
|
Per instalment amount |
10,000 |
In such a scenario stamp duty on your mutual fund investment
will be deducted as follows:
Step 1
1,00,000 X 0.005% = 5
The above calculation is for when you invest in a
debt/liquid fund to eventually transfer in to your principal equity fund.
Step 2
No of instalments is 10 and amount per instalment is 10,000
so that would mean 10,000 X 0.005% = 0.5
0.5 X 10 (no of instalments) = 5
So the total stamp duty paid in the above STP for your mutual
fund investments would therefore be Rs. 10
Will the new rule apply on Redemptions
too?
No, new stamp duty is applicable only on purchases.
What about Dividend reinvestments?
Yes, new stamp duty will be applicable on dividend reinvestments
because each dividend reinvestment instalment is considered as fresh purchase.
What about scheme switches?
Yes because the scheme to which the amount is transferred is
considered as a fresh purchase.
This does not imply double taxation because the scheme from
which the amount is transferred is considered as redemption (there is no stamp
duty on redemption) and the scheme into which the amount is transferred is
considered as purchase.
Do I have to pay the stamp
duty separately?
No, the stamp duty amount will be deducted directly by the
RTA (CAMS, Karvy etc.) in question.
As can be gathered by the various illustrations, the stamp deductions on your mutual fund investments in the long run do not make much difference so there’s no need to lose sleep over it.
What kind of investors should
worry?
- Investors who park huge sums in debt/liquid funds for a couple of days/weeks or months.
- This is because your money is parked for a very short time horizon without the growth expectations of an equity fund.
- Investors who invest based purely on past returns, star ratings, without any thorough research, etc.
- Constant redemptions and investments not only increase your stamp duty but also affects your taxes and takes away from you the privilege of compounding.
- Investors with a very short time horizon in equity mutual funds.
All in all this new rule should not be something that you should waste time pondering over. In the long run it is a negligible amount that when invested well is taken care of by your valuations.
Keep in mind that stamp duty is applicable only on the purchase of mutual funds and not on redemptions.
However if you are one to invest based on random advice, past
performances and without any proper planning or guidance then you have another
added motivator to get your house in order.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
