Stamp Duty on Mutual Funds

What changed in 2020

From 1 July 2020, a uniform stamp duty of 0.005% began applying to the purchase of mutual fund units across India, following amendments to the Indian Stamp Act and a SEBI communication confirming the rollout. Before this, stamp duty treatment varied across states; the change brought a single, centrally collected levy.

The duty is deducted at the time of allotment, so it slightly reduces the number of units you receive for a given investment amount.

What it applies to

The 0.005% charge covers essentially every transaction where you are acquiring units against payment: lump-sum purchases, SIP instalments (including SIPs registered before the rule came in), switch-ins, systematic transfer plan (STP) inflows and dividend (now income distribution) reinvestments.

Crucially, there is no stamp duty on redemptions, switch-outs or any exit, because no fresh consideration changes hands. A separate, higher rate of 0.015% applies when mutual fund units are transferred between demat accounts.

How much it really costs

The rate is deliberately tiny. On a ₹10,000 investment, the stamp duty is just ₹0.50, on ₹1 lakh, only ₹5. For long-term investors, the impact on overall returns is negligible.

The effect is more noticeable for very short holding periods. Because the duty is charged once at entry, annualising that one-time cost over a holding of just a few days, as with liquid or overnight funds used for parking cash, makes the effective drag look larger in percentage terms. This is why the levy matters most to treasury-style, ultra-short-term users and barely registers for a typical SIP investor building wealth over years.

In practice, stamp duty is one of the smallest frictions in Indian mutual fund investing, far less consequential than expense ratios, exit loads or the tax treatment of capital gains, but it is a real, automatic deduction worth understanding.