If you are not aware of all the legal nuances Requires stamp duty and its application, don’t worry, because we have got you covered. Here’s a look at everything you need to know about stamp duty and when you need to pay it.

Stamp duty works as a legal tax that must be paid in full during the completion of any transaction. While the buyer usually pays the stamp duty, there are cases when the buyer and seller mutually decide to split the stamp duty.

The Indian Stamp Act requires stamp duty of 1899 as a means of recording and tracking transactions. As a result, stamp duty functions almost like proof for deal closures and fulfillment. It is a legally backed instrument that can be used as evidence in a court of law in the event of a dispute. 

Stamp duty is something everyone should be aware of, especially if you are purchasing a new home or selling an asset.

What is Stamp Duty?

Mere physical property transfer is not considered valid in the eyes of the law. To make such a property transaction legal, the buyer must pay stamp duty as proof of acquiring the property.

In this context, stamp duty is the government levy paid at the time of the property transactions that makes the physical transfer of property as well as the sales deed certificate legally binding.

Stamp duty is computed per the property’s value and is usually some percentage of the total payable amount. While the rate for stamp duty varies from state to state, the general underlying principle behind stamp duty remains the same. 

When is Stamp Duty Payable?

Stamp duty becomes payable – before executing a transaction document or a day before the execution of the document, a day after, or the next working day after the execution of the document, whichever is earlier. The Stamp Duty on Online Property Registration also requires direct Stamp Duty on the Property Value.

Execution occurs when the buyer and seller sign the document resulting in the transfer of an asset or property.

Points to remember regarding stamp duty

1. Whenever stamp duty is paid but not utilized, it can be refunded within six months
2. There is no problem with using stamp paper purchased more than six months before it was used in a document.
3. Unless stamp duty is paid, certain agreements will not be considered legally binding in a court of law
4. As per the Indian Penal Code, not paying the required stamp duty on a transaction is a criminal offense
5. Delays in paying stamp duty can result in substantial fines ranging from 2 percent to 200 percent of the total payable amount.
6. Generally, stamp duty is to be paid by the purchaser or buyer and not the seller 

Documents Required for Stamp Duty

• Exchange bills
• Credit letters
• Lading bills
• Insurance policies
• Transfer of shares
• Proxies 
• Receipts
• Debentures
• Promissory notes

Stamp duty levy generally varies from state to state. Nonetheless, there is a general pattern that is followed. For instance, let us now take a look at the stamp duty levied by the state of Karnataka. 

Other than the documents mentioned above, Karnataka Government levies stamp duty on:

1. Affidavits
2. Mortgage certificates
3. Adoption letters 
4. Will deed
5. Power of attorney
6. Settlement of moveable property
7. Settlement of immovable property
8. Bonds 
9. Securities issued on loans
10. Rental agreements
11. Lease agreements 
12. Documents for the surrender of the lease
13. LLP Registration 
14. AoA/MoA
15. Construction of property
16. Conveyance

Business Contracts Which Require Payment of Stamp Duty

• Limited Liability Partnerships (LLP): As per the LLP Act, 2008, an LLP has to pay stamp duty at the time of incorporation or registration based on the geographical location and capital contribution.
• Articles of Association: According to the Indian Stamp Act of 1899, execution of memorandum and articles of association, which are required for incorporating firms, require payment of stamp duty.
• Partnership agreements: Any partnership agreement that defines the roles and responsibilities of the partners and contains details regarding the split-up of profits requires the payment of a stamp duty of ₹1000.
• Partnership firm registrations: While whether to register a partnership firm or not is left up to the partners as per the Partnership Act, 1932, if partners do decide to register their firm, then they must pay the prescribed stamp duty.
• Transfer of shares: Any document that deals with the transfer of shares or assets must be duly signed and stamped by the appropriate authorities to be considered legally binding. Share certificates also require payment of stamp duty.
• Debentures: Stamp duty is levied when debentures are transferred and not when issued. Such duty is considered to be a part of marketable securities.

Other business instruments which require the payment of stamp duty for execution are – 

• Bills of exchange/promissory notes
• Letters of credit
• Bonds
• Security certificates for loans

Documents Which Need Not Be Registered but Require Payment of Stamp Duty

1. Power of attorney 
2. Development agreement
3. Agreement of sale to a developer
4. Lease agreement
5. Lease deed for less than one year
6. Memorandum of oral partition
7. Recording of a past transaction

*As per Karnataka State Government laws

Computation of Stamp Duty

Stamp duty is calculated on the present-day market value of a property or asset. It is based on value as per the registration document and not based on the transaction value. Moreover, it is charged on an agreement and not to an individual who is a part of the transaction. A stamp duty reckoner decides the valid rates at which duty must be levied. This book is published on the first of January annually.

Factors which are considered while computing stamp duty are:

1. Property age 
2. Owner’s gender
3. Classification of the property
4. Lease classification
5. Residential/commercial permit
6. Single or multi-storied classification of a building
7. Geographical classification

Usually, stamp duty is calculated as per the rates that apply to the respective state. For example, if a property is valued at 12,00,000, the buyer may have to pay a stamp duty of 84,000 if the rate is 7% in that particular state. Stamp duty also differs based on other factors, as mentioned above, and it is important to check the relevant state government websites for the latest updates.

Payment of Stamp Duty

The various available modes of stamp duty payment are:

• Physical paper: The buyer must buy a physical stamp paper of the required amount from an authorized merchant.
• Franking: Franking requires an authorized agent to vouch that the buyer has paid the required duty. A franking machine is then used to frank the document with an adhesive stamp.
• E-stamping: The Stock Holding Corporation of India Limited handles e-stamping operations in India. E-stamping prevents forging papers and is an easy and straightforward process of paying stamp duty, quickly gaining momentum in India.

 Essentials of Stamping an Instrument

The process of stamping an instrument involves several essential considerations to ensure its legal validity and admissibility. Here are the key essentials:

• Identification of Parties:

The stamp paper used for the instrument should clearly reflect the name of the company or individual who is a party to the instrument. This ensures that the relevant parties are appropriately identified.

• Prescribed Value:

An instrument should be stamped for an amount equal to or higher than the value prescribed under the relevant legislation. Stamping below the prescribed value may lead to legal consequences, and the instrument may be deemed unstamped.

• Ad Valorem Penalty:

Failure to stamp an instrument or under-stamping may attract penalties. The penalty is typically calculated on an ad valorem basis, varying from state to state. The penalty could range from twice to ten times the deficient stamp duty. Deliberate evasion might also result in imprisonment.

• Evidentiary Value:

Appropriate stamping enhances the evidentiary value of an instrument in a court of law. Stamped instruments are generally considered legally valid and admissible as evidence.

• Mixed Nature Instruments:

Some instruments may have a mixed nature, involving both movable and immovable properties. It is crucial to examine and determine the appropriate stamp duty for such instruments.

Stamping on Electronic Contracts

In India, the stamping of e-contracts can be done either through e-stamping or by printing the document and getting it stamped manually.

Historically, the laws governing stamp duty in India did not contemplate stamping requirements for electronic contracts. However, various states have amended their respective state stamp duty legislations to specifically include an ‘electronic record’ within the definition of an ‘instrument’. 

Electronic signatures are legally recognized in India under the Information Technology Act, 2000, and the Indian Contract Act of 1872. The authenticity of electronic contracts is recognized, and stamp duty may need to be paid on e-contracts, similar to contracts in physical form. 

The process to monitor and ensure payment of stamp duty on every e-contract may require significant effort, especially for companies with an online presence that enter into a significant number of e-contracts on a daily basis.

To know about stamp duty rates across India, get in touch with the experts at Vakilsearch who will be able to guide you on the best stamp duty practices. Our experts are veterans who are taking away all the hassle involved in the property registration experience. 

FAQs

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