Redemption of Mutual Fund Unit vs. Switching in Mutual Funds?

In the first week of July, the capital market regulator of India SEBI has provided a clarification finally ending speculations over whether any stamp duty shall be payable on the redemption of mutual funds. It asserted that no stamp duty shall be eligible on the redemption of mutual fund units, however, while intending to switch over from one MF to the other swapping will attract charges under stamp duty. This clarification was released as a result of FAQs on the collection of stamp duty as a result of the applicable amended Indian Stamp Act.

What did the clarification seek to clarify?

According to SEBI, the mutual funds unit scheme to be identified as” securities ” for the levy of stamp duty. Further, the SEBI stated as redemption could neither be regarded as a transfer or issue and nor as a sale. Thus, no stamp duty could be applied to the redemption of mutual fund units.

However, the regulator also states that the treatment will be different in case of switching of MF from one to another as in case of switching, fresh units shall be issued to the unitholder even though there would be no physical consideration paid or any transfer of ownership involved in reality.

How is stamp duty levied on the sale of securities?

As per the legal provisions, whenever an MF unit is issued a stamp duty is charged on the value on the issuance of mutual fund units depending upon the value of units exclusive of other costs like service charges, average maintenance fees (AMC), GST, etc.

Thus, for instance, if the MF units are issued of worth 1 crores, an amount equal to Rs.500 stamp duty has to be remitted to the states.  Earlier, the Ministry of Finance had informed registrars to an issue and the Share Transfer Agents (RTAs) to act as a depository for restricted purposes of a collecting agent under the provisions of the Indian Stamp Act 1899. Therefore, the (RTAs)  have been obligated to charge stamp duty in the MF units in non-Demat form and AIF transactions in Demat form.

Though, in cases of mutual funds units /AIF transactions identified under the recognized stock exchange, such respective stocks exchange or the authorized Clearing Corporation or a depository have been allowed to levy and collect stamp duty. On the transfer of mutual funds / AIFs in the non-Demat form is to be received from the transferor, however; such transfers are legally outside the ambit of the RTAs.

Conclusion:

Thus, the SEBI has maintained that such stamp duty charged on such MF units and AIF transactions could be received and remitted only through the RTAs i.e. RTAs for units in non- Demat form and the depositories for units in Demat forms. Where the transferee goes to the RTA completing the transfer of units in their books, later RTA will collect the stamp duty from the transfer beforehand making the transfer to be dispatched to the transferee state of domicile.

Further, the collecting agents shall be required to handover the collected stamp duty to the state government within a duration of three weeks from the end of each month. Also, where such MF and AIF units are issued in physically, such stamp duty has to be charged and discharged by the concerned RTA.

Where any such collecting agent (RTAs or depositories) do not collect or remit the stamp duty so charged efficiently to the state government within a period of fifteen days from the expiry specified time, such agents shall be penalized shall be with a fine amount of not less than Rs.1 lakh that may also extend up to one percent of the default amount.

Accordingly, the Ministry of Finance has informed that the states shall start collecting stamp duty on specified uniform rates on such share transactions of securities shares, debentures, and other securities.

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