Topic 5 of 8~5 min read

Stamp Duty on Mutual Fund Transactions

Definition

From July 1, 2020, stamp duty of 0.005% is levied on the purchase (subscription), switch-in, and SIP installments of mutual fund units. This duty is applicable on the transaction value and is collected by the AMC at the time of unit allotment by issuing units at a fractionally lower NAV. No stamp duty is charged on redemption, switch-out, or Systematic Withdrawal Plan (SWP) transactions. The stamp duty is collected by the AMC and remitted to the respective state government where the investor is registered.

In Simple Words

Stamp duty on mutual funds is a relatively small but real cost that every investor bears. At 0.005%, it works out to Rs 5 for every Rs 1,00,000 invested. It may sound negligible, but for large institutional investors moving crores of rupees through liquid funds daily, it adds up. In practical terms, when an investor puts Rs 1,00,000 into a mutual fund, the AMC calculates stamp duty of Rs 5 (0.005% of Rs 1,00,000) and allots units worth Rs 99,995 instead of Rs 1,00,000. The investor sees a slightly lower number of units in the statement. For SIP investors, stamp duty is deducted from every monthly installment — so a Rs 10,000 SIP sees Rs 0.50 deducted each month. Over a year, that is Rs 6. Over 20 years, it is Rs 120 — truly negligible. But for a corporate treasury investing Rs 50 crores in a liquid fund for 7 days, the stamp duty is Rs 2,50,000 — and that can meaningfully reduce the short-term return. The key point: stamp duty applies only on money going IN (purchase, SIP, switch-in). Money coming OUT (redemption, SWP, switch-out) is stamp-duty-free. This was designed to generate state revenue from the massive daily inflows into mutual funds without discouraging long-term investors.

Real-Life Scenario

Mohan is an aggressive SIP investor. He runs three SIPs: (1) Rs 25,000/month in a large-cap fund, (2) Rs 15,000/month in a mid-cap fund, and (3) Rs 10,000/month in an ELSS fund. Total monthly SIP = Rs 50,000. Stamp duty per month = Rs 50,000 x 0.005% = Rs 2.50 Stamp duty per year = Rs 2.50 x 12 = Rs 30 Over 20 years of SIP = Rs 600 Now compare with Mohan's corporate employer, Infosys Treasury, which parks Rs 100 crores in an overnight fund for 3 days. Stamp duty = Rs 100,00,00,000 x 0.005% = Rs 5,00,000. The overnight fund return for 3 days at 6.5% annual rate would be approximately Rs 5,34,247. After stamp duty, the net return drops to Rs 34,247 — the stamp duty consumed 93.6% of the return! This is why corporate treasuries are highly sensitive to stamp duty on ultra-short-term parking.

Key Points to Remember

Stamp duty rate: 0.005% on purchase, switch-in, and SIP transactions of mutual fund units

Applicable from July 1, 2020 under the Indian Stamp Act (as amended by Finance Act 2019)

No stamp duty on redemption, switch-out, or SWP (Systematic Withdrawal Plan) transactions

Collected by the AMC by allotting units at a slightly adjusted NAV (investor receives marginally fewer units)

Remitted by the AMC to the state government where the investor is registered

Impact on retail SIP investors is negligible — Rs 0.50 per Rs 10,000 SIP per month

Significant impact on institutional/corporate investors making large short-term investments in liquid/overnight funds

Stamp duty applies equally to all mutual fund categories — equity, debt, hybrid, ETFs, and FoFs

Formula

Stamp Duty Calculation:
Stamp Duty = Transaction Value x 0.005%

Effective Units Allotted:
Units = (Investment Amount - Stamp Duty) / Applicable NAV

Annual Impact on SIP:
Annual Stamp Duty = Monthly SIP Amount x 0.005% x 12

Numerical Example

Example 1 — Retail SIP investor:
Monthly SIP = Rs 25,000
Stamp duty per SIP = Rs 25,000 x 0.005% = Rs 1.25
Effective investment = Rs 25,000 - Rs 1.25 = Rs 24,998.75
If NAV = Rs 50, units allotted = Rs 24,998.75 / Rs 50 = 499.975 units (instead of 500 units)
Annual stamp duty = Rs 1.25 x 12 = Rs 15.00

Example 2 — Lump sum investment:
Investment = Rs 10,00,000 in an equity fund
Stamp duty = Rs 10,00,000 x 0.005% = Rs 50
Effective investment = Rs 10,00,000 - Rs 50 = Rs 9,99,950
If NAV = Rs 200, units allotted = Rs 9,99,950 / Rs 200 = 4,999.75 (instead of 5,000)

Example 3 — Corporate treasury parking:
Amount parked in liquid fund = Rs 25,00,00,000 (Rs 25 crores)
Stamp duty = Rs 25,00,00,000 x 0.005% = Rs 1,25,000
If parked for 7 days at 7% p.a., gross return = Rs 25,00,00,000 x 7% x 7/365 = Rs 3,35,616
Net return after stamp duty = Rs 3,35,616 - Rs 1,25,000 = Rs 2,10,616
Stamp duty as % of return = 37.2%

Frequently Asked Questions

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Question 1 of 3Score: 0/0

Stamp duty on mutual fund transactions is levied at the rate of:

Summary Notes

Stamp duty of 0.005% applies on purchase, SIP, and switch-in of MF units from July 1, 2020

No stamp duty on redemption, SWP, or switch-out transactions

Collected by AMC through slightly reduced unit allotment — remitted to state government

Negligible impact on retail investors (Rs 0.50 per Rs 10,000 SIP), significant for institutional short-term investors

Applies uniformly to all MF categories — equity, debt, hybrid, ETFs, FoFs