9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units

Stamp Duty on Mutual Fund Units

Since 1 July 2020, stamp duty applies to transactions in mutual fund units under the amended Indian Stamp Act framework.

What counts as an issue

Stamp duty at 0.005% applies whenever units are created and allotted, which is a wider set of events than investors expect:

• Lump-sum purchases
• Every systematic investment plan instalment
• Every systematic transfer plan instalment into the receiving scheme
• Switch-ins — the purchase leg of a switch
• IDCW reinvestment — units issued against a reinvested distribution

What does not attract stamp duty

• Redemption. No units are issued, so no duty arises.
• Switch-outs, considered separately from the switch-in leg — the duty attaches to the units being created.
• IDCW payout in cash, since no units are issued.

How it is charged

Duty is deducted from the investment amount before units are allotted.

Worked example. An investor invests INR 1,00,000 at an NAV of INR 25.00.

Stamp duty     = 0.005% of 1,00,000 = INR 5.00
Net investible = 1,00,000 - 5.00    = INR 99,995.00
Units allotted = 99,995.00 / 25.00  = 3,999.80 units

The amounts are small — INR 5 on INR 1 lakh — and the exam tests whether you know the rate and which transactions attract it rather than expecting elaborate computation.

The transfer rate

The 0.015% rate applies to a transfer between persons, such as an off-market transfer of dematerialised units or transmission arrangements involving a change of ownership. It does not apply to ordinary purchase and redemption with the fund, which is why most investors never encounter it.

Securities Transaction Tax

Securities Transaction Tax (STT) is levied on transactions in specified securities, and its application to mutual fund units is narrow and asymmetric.

Three features carry the examination weight:

1. STT applies only to equity-oriented schemes. Redeeming a liquid fund, a corporate bond fund or a gold fund of funds attracts no STT at all.
2. STT is a sell-side charge on units. Buying units of an equity-oriented scheme attracts no STT.
3. STT paid is not deductible in computing capital gains. It reduces the amount received but does not reduce the taxable gain.

Worked example. An investor redeems equity-oriented units worth INR 5,00,000.

STT = 0.001% of 5,00,000 = INR 5.00

Why STT matters beyond its size

The amount is trivial, but payment of STT is a condition for the concessional treatment of equity-oriented units under sections 111A and 112A. The 20% short-term rate and the 12.5% long-term rate with the INR 1.25 lakh exemption are available because the transaction is STT-paid. This is the structural reason the tax exists on units, and it is the point an exam question is most likely to be built around.

Comparing the Two

The single sentence worth memorising: stamp duty is charged when units are created, on every scheme; STT is charged when equity-oriented units are sold.

Effect on Systematic Investors

Because stamp duty attaches to each instalment, an investor running a monthly SIP pays it twelve times a year. On a INR 10,000 monthly SIP that amounts to INR 0.50 per instalment, or INR 6 a year. It is disclosed in the account statement and occasionally prompts a query, and the honest answer is that it is a statutory levy of negligible magnitude that does not merit changing investment behaviour.

A Switch, Worked End to End

A switch is the transaction where both levies and the capital gains rules meet, so it repays being worked through in full.

Facts. An investor switches INR 3,00,000 from an equity-oriented scheme, held 14 months, into a debt scheme of the same fund house. There is no exit load remaining. The cost of the units being switched out was INR 2,40,000.

Switch-out leg (equity-oriented scheme)
  Redemption value            = INR 3,00,000
  STT at 0.001%               = INR 3.00
  Long-term capital gain      = 3,00,000 - 2,40,000 = INR 60,000
  Taxed under section 112A after the annual exemption

Switch-in leg (debt scheme)
  Amount received into scheme = INR 3,00,000
  Stamp duty at 0.005%        = INR 15.00
  Net invested                = INR 2,99,985

The two levies together come to INR 18. The capital gains charge is the material consequence, and it is the one investors do not anticipate, because the money never left the fund house and no cash was received. A switch feels administrative and is treated as a sale.

Exchange-Traded Units

Where units are bought and sold on a recognised stock exchange rather than with the fund — exchange-traded funds, or units held in demat and sold through a broker — STT applies on the sale of equity-oriented units at 0.001%, payable by the seller, in the same way as a redemption to the fund. Purchases of such units attract no STT.

Three Traps Worth Rehearsing

1. Stamp duty is not confined to purchases. SIP instalments, STP instalments, switch-ins and IDCW reinvestment all create units and all attract it.
2. STT is not levied on debt schemes at all, however large the redemption.
3. Neither levy is deductible in computing capital gains, so neither reduces the tax payable.