How lower STT on mutual funds will benefit investors

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THERE is a change now in the sum investors will to pay from June 1 by way of securities transaction tax (STT). The change, proposed in the Union budget, will take effect now since the finance bill has been passed. As a result, investors will pay a lower STT for their mutual fund investments. It should be interesting to see what impact the move has. It is also worth watching what steps the investor takes to benefit from this lower rate.

Nature of tax:

The STT is a tax paid when there is transaction, usually on the stock exchanges. It is mainly associated with direct equities or shares, but there is an element of STT that comes into play when an individual transacts in mutual funds as well.

There are three areas where the STT would come into play. These include a situation where the individual buys equity oriented mutual funds on a stock exchange.

The other position is when equity-oriented mutual funds are sold on the stock exchange. The third situation is slightly different. This is when an individual sells an equity-oriented fund back to the fund house directly.

Buying equity-oriented funds:

Equity-oriented funds can be bought on the stock exchange. This is how the mutual fund platform on the stock exchanges is used to purchase fund units. This involves the units going into the individual's demat account. Before June 1, there was an STT of 0.1 per cent payable by the buyer. This has been abolished so that the investor doesn't have to pay while buying equity-oriented fund units on the stock exchange. But since the amount that would be paid wasn't very high, it is unlikely to be an important factor in the decision making process.

Selling equity-oriented funds:  

The other side of the transaction that involves selling equity-oriented fund units on the stock exchange attracts a small STT. This too has been reduced to a level that is insignificant. The amount has come down from 0.1 per cent to 0.001 per cent. In fact, a better thing would have been to eliminate the tax and ensure that the administrative process is eliminated for the investor's ease.

Selling to the mutual fund:

 

Another change has taken place outside the stock exchange where the individual sells mutual fund units back to the fund. In case of a normal, open-ended fund, the mutual fund is at the other end of the transaction.

The fund is the one that is buying when the investor is selling units and vice versa.

Until now, there was a tax of 0.25 per cent on this kind of transaction.

This has been brought down to 0.001 per cent.

This means on a transaction of Rs 1 lakh the tax will be just Re 1. Again with such a low figure, the tax could have been just knocked off. This would have given the investor a measure of relief.

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