Stamp Duty in India

We often come across the word Stamp duty and wonder what stamp duty is. Stamp duty is a tax levied on certain types of transactions, typically on legal documents such as deeds, contracts, or other written agreements. The tax is usually a percentage of the total value of the trade or the property involved. It is paid by the buyer or the seller, depending on the specific circumstances. It aims to generate revenue for the government and discourage certain types of transactions like benami transactions. The rates of stamp duties vary depending on the state and the type of transaction. Some jurisdictions may exempt certain types of transactions or offer reduced rates for first-time buyers or specific groups of people.

In India, stamp duties are governed by the Indian Stamp act 1899 and the respective stamp acts of the states. It deals with ‘instruments,’ and the act discusses stamp duty levied on instruments. 

How and Why is it Important?

Stamp duty is an important source of revenue for governments as it generates significant income for the treasury and is essential while admitting a document in court. If you present an agreement in the court on which stamp duty is applicable but is not paid, a penalty will be imposed on the party presenting it as per the stamp act. 

It is charged on certain types of transactions, typically involving the transfer of immovable property, and is paid by the buyer or the seller. On agreements, it is charged to create evidence of the transaction or instrument taking effect. Moreover, the revenue generated from stamp duty is used to fund public services such as health care, education, infrastructure, and other essential services, making stamp duty payments vital in India.

In addition to generating revenue for the government, stamp duty is also used as a policy tool to regulate certain types of transactions. For instance, in the real estate market, stamp duty is intended to discourage speculative buying and selling of properties and help regulate property prices. By increasing the cost of buying or selling property, stamp duty can help to slow down the pace of real estate transactions and prevent rapid fluctuations in property prices.

Stamp duty can also be used to support social policies like certain countries offering reduced or waived stamp duty rates for first-time buyers, low-income households, or certain types of properties to promote affordable housing. It is always advisable for individuals and businesses to be aware of the specific rules and regulations related to stamping duty in their jurisdiction to ensure compliance and avoid any potential penalties or legal issues.

Legal Framework

Under the Indian Stamp Act, stamp duty is levied on a wide range of documents such as conveyance deeds, agreements, bonds, power of attorney, lease deeds, and other instruments. Now the definition of ‘Instrument’ is as follows: 'a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.’

Documents and transactions are taxed at different rates depending on their nature. Generally, it is paid by the buyer or transferee, although sometimes the seller or transferor pays it as well. Even though Indian Stamp Act is a central law, people majorly refer to state laws for reference to stamp duties. The act also provides for penalties for non-payment or underpayment of stamp duty. If any document is not properly stamped, it is considered invalid and cannot be used as evidence in a court of law. Additionally, state laws in India also have rules and regulations related to stamp duties. These may include exemptions or concessions for certain types of transactions or certain groups of people, such as first-time homebuyers or low-income households.

Like Indian citizens, NRI will be liable to pay stamp duty and registration charges to complete the formal arrangement, giving the property transfer legal validity; as long as the property cost is over Rs 100, which it invariably is. Many states provide that the shortfall in stamp duty must be paid within a specified period (most commonly 3 months) of the documents being brought into the state. Thus, stamp duty implications must be examined when documents or their photocopies are being moved from one state to another and even when documents are being transmitted by email to another state in India. One must also be careful while bringing documents executed overseas into India, whether it is by email, physically, or by photocopies.

If the agreement is executed outside of India

Section 18 of the Indian Stamp Act, of 1899, states that any document executed outside India can be stamped in India. As a result, any agreement executed on plain paper can be presented to the concerned registrar in India for authentication, who will collect the Indian stamp duty by cash and authenticate it.

Types of Stamp Duties in India

The types of stamp duties in India can be broadly classified into three categories: 

• Property-related stamp duty

This type of stamp duty is applicable on property transactions, such as the sale, purchase, transfer, and lease of immovable property such as land, buildings, and apartments. The rate of stamp duty varies from state to state and is calculated as a percentage of the transaction value or the property's market value, whichever is higher. Some examples are Sale Deed, Gift Deed, Deed of Conveyance, etc.

• Share-related stamp duty

This type of stamp duty applies to transactions related to the transfer of shares, debentures, and other securities. The rate of stamp duty can be found in the articles of the stamp duty act of the state in which the agreement is being executed. Further, different stamp duty is given in the act for all types of agreements. Some examples are Share Subscription Agreements, Share Purchase Agreements, Business Transfer Agreements, etc.

• Agreement stamp duty

It is a type of stamp duty that is payable on the various agreements we execute daily. Some examples are Master Service Agreements, Non-Disclosure Agreements, or any other agreement which are mentioned in the schedule of the stamp Act.  

• Other stamp duties

Apart from property and share-related stamp duties, there are other types of stamp duties in India, such as: 

• Insurance policies stamp duty: This is applicable on life insurance policies and is collected during the time of policy issuance. 
• Power of attorney stamp duty: Applicable on the power of attorney documents that grant legal authority to a person to act on behalf of another person.
• Lease agreement stamp duty: It applies to lease agreements for immovable property.
• Promissory note stamp duty: Stamp duty is paid on promissory notes, which are legal instruments that acknowledge a debt and a promise to repay it.
• Court fee stamp duty: This applies to court fees paid for legal proceedings. 

The stamp duty rates vary from state to state, and it is important to check the applicable rates before entering into any transaction or executing any legal document to avoid any legal complications in the future.

How Stamp Duty is Calculated?

The stamp duty calculation depends on the type of transaction; factors that affect the price of stamp duty are the nature of the document, the state where the transaction takes place, and the value of the property. Here are some common examples of how stamp duty is calculated in India: 

• Property-related stamp duty: The stamp duty for property transactions is calculated based on the market value or consideration amount, whichever is higher. The market value is determined by the state government's valuation authorities. The stamp duty rate varies from state to state, ranging from 5% to 12% of the property's market value or consideration amount. 
• Share-related stamp duty: The stamp duty for share transactions is calculated as a percentage of the security's transaction value or market value, whichever is higher. The rate of stamp duty for share transactions is generally 0.005% of the security's transaction value or market value, but this can vary depending on the state where the transaction takes place. 
• Lease agreement stamp duty: The stamp duty for lease agreements is calculated based on the lease period and the rent amount. The stamp duty rate for lease agreements is generally 0.25% to 0.5% of the total rent for the lease period.
• Promissory note stamp duty: The stamp duty for promissory notes is calculated based on the amount mentioned in the promissory note. The stamp duty rate for promissory notes is generally 0.1% to 0.2% of the amount mentioned in the promissory note.

These were the general calculation of the stamp duties. To ascertain the actual amount, one has to look into the schedules of the stamp acts of the states in which they are executing the agreement. 

Conclusion

In India, stamp duty is one of the most important aspects of purchasing a property or executing an agreement. To ensure a smooth and stress-free home purchase, understanding stamp duty penalties and tax benefits is crucial, and to keep your company s legal documents admissible in court, one must pay the applicable stamp duties as applicable by the stamp Act.  

About The Author:

Adv. Devadatt Shardul holds a Bachelor’s Degree in Law (LLB) from Pune University. His office is centrally located on Law College Road in Pune and boasts a team of dedicated professionals committed to delivering prompt, high-quality service. Enrolled with the Bar Council of Maharashtra & Goa, Adv. Shardul specializes in Property Laws, including Contracts, Mortgages, Banking Laws, Insurance, Tenancy, Revenue, Registration, Urban Land (Ceiling & Regulation), Ownership Flats, and Co-operative Societies Acts. Before individual practice, he served as a Partner/Director at M/s. NMD Advisory Services for 13 years and was a leading Channel Partner for ICICI Bank's mortgage business.