Stamp duty
Also written Stamp duty on mutual fund units
A levy on mutual fund units from 1 July 2020: 0.005% of the amount invested on every issue of units — lump sum, SIP, STP, switch-in, IDCW reinvestment — and 0.015% on transfers.
In plain language
After amendments to the Indian Stamp Act in February 2019, stamp duty became payable on the issue and transfer of mutual fund units, with effect from 1 July 2020.
Two rates apply:
- 0.005 per cent of the investment amount whenever units are issued — a fresh purchase, an additional purchase, an SIP or STP instalment, a switch-in, or the reinvestment of IDCW.
- 0.015 per cent when units are transferred, such as between demat accounts.
The charge is collected from the investor's money before units are allotted. Units are allotted for the amount left after deducting stamp duty, so an investor never sees a separate bill — just slightly fewer units.
It applies to both physical (statement of account) and demat units. It is the reason the workbook qualifies the statement that sale price equals NAV: with entry load banned, the sale price is the NAV subject to applicable stamp duty.
How it works
Box 8.2 of the workbook lists the scheme inflows that attract duty at 0.005%:
| Transaction | Stamp duty on issue? |
|---|---|
| Purchase | Yes |
| Additional purchase | Yes |
| Dividend (IDCW) reinvestment | Yes |
| Systematic Investment Plan (SIP) | Yes |
| Systematic Transfer Plan (STP) | Yes |
| IDCW Transfer Plan (DTP) | Yes |
| Triggers from past SIP/STP registrations | Yes |
Section 8.4 adds switch-ins to the list. Transfers of units attract 0.015%.
The mechanics of allotment:
Stamp duty = Investment amount × 0.005%
Net investment = Investment amount − Stamp duty
Units allotted = Net investment ÷ Applicable NAV
Stamp duty is easy to confuse with the other small charges on a mutual fund transaction. Securities Transaction Tax is paid by the seller on redemption or sale of equity-oriented fund units (nil on purchase). Exit load reduces the redemption price and is credited back to the scheme. Stamp duty is paid on the way in, and on transfers — for every kind of scheme.
A worked example
A lump sum. Kavita invests Rs 5,00,000 in a debt fund whose applicable NAV is Rs 125.40. The NAV is illustrative; the rate is the workbook's.
Stamp duty = 5,00,000 × 0.005% = Rs 25
Net investment = 5,00,000 − 25 = Rs 4,99,975
Units allotted = 4,99,975 ÷ 125.40 = 3,987.041 units
Without stamp duty she would have received 3,987.241 units — 0.199 units more, worth the Rs 25.
An SIP. A Rs 10,000 monthly SIP pays 50 paise each month, or Rs 6 a year. Every instalment is a fresh issue of units, so every instalment is charged.
A switch. Switching Rs 2,40,000 from an equity fund into a liquid fund is a redemption plus a purchase. The switch-in attracts Rs 12 of stamp duty. The switch-out is a sale of equity-oriented fund units, so STT at 0.001% — Rs 2.40 — applies, along with any exit load and capital gains tax.
A transfer. Moving units worth Rs 2,00,000 from one demat account to another attracts duty at 0.015%, or Rs 30.
None of these amounts will change an investment decision. What they change is exam arithmetic: an allotment question that says "ignore stamp duty" is telling you something, and one that does not may expect the deduction.
Why NISM asks about it
Chapter 8 (Taxation), section 8.4, gives both rates, the effective date and Box 8.2 listing the transactions covered; Chapter 7, section 7.4, qualifies sale price = NAV with stamp duty. Expect a recall question on the rate or date, a question on which transactions attract it, and possibly an allotment computation net of stamp duty.
Common exam traps
- 0.005% on issue, 0.015% on transfer. Swapping them is the standard distractor.
- Effective 1 July 2020, after Indian Stamp Act amendments in February 2019.
- Every inflow counts — SIP and STP instalments, switch-ins and IDCW reinvestments included, and even triggers from past SIP/STP registrations.
- Units are allotted net of stamp duty; it is not billed separately.
- Applies to physical and demat units alike.
- Stamp duty is not STT. STT is paid by the seller of equity-oriented fund units; stamp duty is paid on issue and transfer of any scheme's units.
- Sale price = NAV, subject to stamp duty — entry load is banned, but this levy is not a load.
Check yourself
1.Under current SEBI rules, the sale price of units of an open-ended scheme is:
- a)NAV plus entry load of up to 1%
- b)The same as the NAV, since entry load is banned
- c)NAV plus applicable exit load
- d)Decided by each AMC independently
Show the answer
Answer: (b) The same as the NAV, since entry load is banned
SEBI has banned entry loads, so the sale price is the same as the NAV (subject to applicable stamp duty).
Historically, schemes could keep the sale price above NAV — a NAV of ₹11 with a 1% entry load meant paying ₹11.11. That is no longer permitted.
Exit load remains permitted and works the other way: it reduces the repurchase price below NAV. At NAV ₹11 with a 1% exit load, redemption fetches ₹10.89.
Where this is taught
- Series V-A · Chapter 8: Taxationintroduced here
- Series II-B · Chapter 11: Operational Concepts of Mutual Fundsintroduced here
Related terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Securities Transaction TaxA central government tax collected by the exchange on the sell side of every futures and option trade — 0.05% of futures traded value, 0.15% of option premium, and 0.15% of settlement price on exercise.
- Entry loadThe former mark-up of a mutual fund's sale price over NAV, charged when an investor bought units. SEBI has banned it, so units are now sold at NAV, subject only to stamp duty.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- SwitchA single mutual fund transaction that redeems units from one scheme (or option) and invests the proceeds in another on the same date — a redemption and a purchase rolled into one.
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- MF UtilitiesA transaction aggregation platform connecting investors, RTAs, distributors, banks and AMCs, which gives each investor a Common Account Number to consolidate holdings and transact across fund houses.
- IDCWThe renamed dividend option of a mutual fund scheme — a payout that is part income and part return of your own capital, which is why the NAV falls by exactly the amount distributed.
- Systematic Transfer PlanA standing instruction to move a fixed amount from one scheme into another of the same mutual fund at a set frequency — a withdrawal plan out of the source and a SIP into the target.
- Liquid fundAn open-ended debt scheme investing only in debt and money market securities maturing within 91 days — among the lowest-risk mutual funds, used to park short-term surplus money.