Tax Reforms

Stamp Duty on Mutual Fund Purchases


From UPSC perspective, the following things are important :

Prelims level: Mutual Funds, Stamp Duty

Mains level: Regulation of capital market in India

The Amendments in the Indian Stamp Act, 1899 has been brought through Finance Act 2019 for Rationalized Collection Mechanism of Stamp Duty across India with respect to Securities Market Instruments.

Up till now, we knew that stamp duties are levied on property transactions, registrations etc. With the Finance Act 2019, the stamp duties are also levied on Mutual Funds.

What is Stamp Duty?

  • Stamp duty is a legal tax payable in full and acts as evidence for any sale or purchase of a property. It is payable under Section 3 of the Indian Stamp Act, 1899.
  • The levy of stamp duty is a state subject and thus the rates of stamp duty vary from state to state.
  • The Centre levies stamp duty on specified instruments and also fixes the rates for these instruments.
  • It is usually paid by the buyer with regardless of agreement and in case of property exchange, both seller and the buyer has to share the stamp duty equally.
  • A stamp duty paid instrument/document is considered a proper and legal instrument/document and has evidentiary value and is admitted as evidence in courts.

What is the move?

  • Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent and any transfer of security will attract a stamp duty of 0.015 per cent.
  • The government had introduced changes to the Stamp duty Act last year by introducing a uniform rate of stamp duty on the trading of shares and commodities.
  • All categories of mutual funds (except for ETFs) will attract stamp duty for the first time.
  • Shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states.

Where all will it be applicable?

  • The stamp duty will be applicable on all transactions, including shares, debt instruments, commodities and all categories of mutual fund schemes.
  • As for mutual funds, it will be applicable on all fresh purchases, including the fresh monthly purchases in previously registered Systematic Investment Plans.
  • It will also be applicable if investors switch from one scheme to another and also in case of dividend reinvestment transactions.
  • Transfers of units from one Demat account to another, including market/off-market transfers, will also attract stamp duty.

How does it impact the investor?

  • The impact on long-term investments by a retail investor is nominal.
  • Since the stamp duty will be charged a one-time charge, if an investor invests Rs 1 lakh in a mutual fund scheme or in stock and holds it for two years, he will have to pay a duty of only Rs 5.
  • In fact, it will be marginally lower as the stamp duty is applicable on the net investment value i.e gross investment amount less than any other deduction like transaction charge.
  • There is no duty at the time of redemption.

What about big investors?

  • The impact is higher for investors with short-term investment horizons such as banks and corporates who invest in liquid and overnight schemes of mutual funds.

How much revenue can it generate for the government?

  • In the financial year 2019-20, the mutual fund industry mobilized aggregate funds of over Rs 188 lakh crore.
  • A high portion of that was in overnight funds or liquid funds.
  • A 0.005 per cent stamp duty on this amount works out to Rs 940 crore.
  • If the industry continues to mobilise funds to the tune of Rs 190 lakh crore or higher, it will generate revenues of nearly Rs 1,000 crore for the government from mutual fund transactions itself.

Back2Basics: Mutual Funds

  • MF is a trust that collects money from a number of investors who share a common investment objective.
  • Then, it invests the money in equities, bonds, money market instruments and/or other securities.
  • Each investor owns units, which represent a portion of the holdings of the fund.
  • The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
  • It is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
  • All funds carry some level of risk. With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.

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