Stamp Duty on Mutual Funds
Stamp duty on mutual funds is a levy of 0.005% on the purchase amount of mutual fund units, introduced effective 1 July 2020 under the amended Indian Stamp Act, 1899, applicable to all purchase and switch-in transactions including SIP instalments, and deducted by the AMC before unit allotment.
The Union Budget 2019-20 proposed amendments to the Indian Stamp Act, 1899 to create a uniform stamp duty framework for financial securities including mutual fund units, which came into effect from 1 July 2020. Before this amendment, mutual fund units were largely exempt from stamp duty in most states, creating an inconsistency compared to other financial instruments.
The stamp duty rate is 0.005% on the purchase value for regular purchase transactions, SIP instalments, dividend reinvestment, and switch-in transactions. For example, on a lump-sum purchase of Rs 1,00,000, stamp duty of Rs 5 is deducted before unit allotment, meaning units worth Rs 99,995 are actually allotted. While this amount appears trivial in isolation, it applies to every single SIP instalment, compounding the total levy across the investment horizon. On a Rs 10,000 monthly SIP over 20 years (240 instalments), the cumulative stamp duty paid would be approximately Rs 240 — still modest, but it represents a marginal drag on XIRR.
Stamp duty is not applicable on redemptions or dividend payouts (where the dividend is transferred to the investor's bank account rather than reinvested). It is also not applicable on switch-out or redemption transactions. The levy applies uniformly to direct and regular plans, equity and debt schemes, and new fund offers.
From a tax perspective, stamp duty paid on mutual fund unit acquisition is not separately deductible as an expense for capital gains computation under current income tax provisions. The cost of acquisition for capital gains purposes is the NAV at which units are allotted (which is already net of stamp duty), so investors cannot claim stamp duty as an additional cost to reduce taxable gain.
For institutional investors making large lump-sum purchases, even 0.005% on a Rs 100 crore investment works out to Rs 50,000 per transaction. This has made the stamp duty a consideration in high-frequency institutional treasury management, particularly in liquid and overnight funds where daily purchases and redemptions are common. AMCs deduct and remit this duty to the government, so investors have no separate filing obligation.