Stamp duty changes from July! How this affects your investments?

With the Stamp Duty Act coming into effect from July 01, 2020, stamp duty collected across the country would be uniform.

July 10, 2020 9:57 IST | India Infoline News Service
Recently, the government announced significant changes to the stamp duty which could affect investors at various stages. Stamp duty is to be levied and collected on financial transactions at the national level from the July 01,2020.   The changes were initially slated to be implemented from January but were deferred to April and then July.

The stamp duty so far is a state subject and is collected by some states, mostly as a fixed amount, depending on the value of a securities transaction. While some states have abolished it on many transactions, different states used to levy it on different transactions at different rates. With the Stamp Duty Act coming into effect from 1st of July, stamp duty collected across the country would be uniform. Another significant change bought about by the Act is levying stamp duty on off-market transactions. Prior to this, there was no stamp duty applicable on off-market transactions in demat form. This included purchase and sale of unlisted shares and gifting of financial securities. However, this is now under the purview of the Stamp Duty Act.

Stamp duty will be levied on the following transactions:

1. Mutual funds: There will be a stamp duty imposed on mutual fund investments at 0.005%. This will be applicable on purchase of mutual fund units, including lump-sum investments as well as via systematic investment plans and systematic transfer plans.Investors who have mutual fund units issued against purchase transactions (whether through lump-sum investments or SIP or STP or switch-ins or dividend reinvestment) would be subject to levy of stamp duty at 0.005% of the amount invested. Additionally, even transfer of mutual fund units between demat accounts will attract stamp duty at 0.015%. The stamp duty will be applicable on all mutual funds—equity, hybrid, debt, index funds and even exchange-traded funds. At 0.005%, the impact may not be huge for people who have long investment horizons. However, the impact will be more apparent for debt funds, especially overnight and liquid funds, where the investment horizon is significantly shorter (close to 90 days).

2. ULIP, NPS, PF:  The stamp duty will have a step-down effect on Unit Linked Plans (ULIP), National Pension System (NPS), Provident Fund (PF). These schemes invest in mutual funds through direct or indirect schemes and hence will be affected by the stamp duty.

3. Options, futures, currency,etc.: The stamp duty will also change for futures, options, currency and interest rate derivatives as well as debentures, transfer of demat securities, government securities and repo on corporate bonds.

Stamp duty applicable on various transactions:

Instrument Rate
Issue of Debenture 0.005%
Transfer and Re-issue of debenture 0.0001%.
Issue of security other than debenture 0.005%
Transfer of security other than debenture on delivery basis; 0.015%
Transfer of security other than debenture on non-delivery basis 0.003%

Derivatives–– Rate
(i) Futures (Equity and Commodity) 0.002%
(ii) Options (Equity and Commodity) 0.003%
(iii) Currency and Interest Rate Derivatives 0.000%
(iv) Other Derivatives 0.002%
Government Securities 0.000%
Repo on Corporate Bonds 0.00001%
Source: Department of Finance, FAQs

The process of collecting Stamp duty:

According to the statement from the government, from 1st July onwards, stock exchanges will collect stamp duty on trading stocks and commodities on exchanges, while depositories will collect on off-market transactions, and deposit the proceeds with the central government, which will then be divided among states. The new rules also do away with double imposition of stamp duty. The duty will be levied only once on a buyer as compared to the earlier practice of imposing duty on the buyer and seller. The notification also explains that stamp duty will be payable to the state in which the buyer in a transaction is located.

How will it affect the common investor?

The effect on a long-term investor may be miniscule. Since the stamp duty is a one-time charge, if an investor invests Rs1 lakh through SIP or lumpsum in a mutual fund scheme or and holds it for two years, he will have to pay a duty of only Rs5. In fact, it will be marginally lower as the stamp duty is applicable on the net investment value i.e. your total investment minus deductions like transaction charge. There is no duty at the time of redemption. The same transaction applies if you bought equities instead of mutual funds.

Short term investors, however, could feel a pinch. These include banks and corporates who generally transact frequently through liquid and overnight schemes of mutual funds. While the one-time charge is only 0.005%, this could compound if one makes multiple transitions in various schemes in a short period of time. The annualized costs could stand in the range of 0.06-0.26% depending upon how frequently an investor transacts. The annual bill of a monthly transaction could cost 0.06% while the impact of weekly transactions could jump to 0.26% per annum.

This will also affect investors who transacted in states where the stamp duty rates were lower than the current 0.005%.

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