Stamp Duty on Share Transfer

Transferring shares is a common activity in both listed and unlisted companies. Whether you are buying shares from another shareholder, selling your stake or restructuring ownership, one important legal aspect you cannot overlook is stamp duty. In India, stamp duty is a form of tax levied by the government on certain documents and transactions to make them legally valid. For share transfers, paying stamp duty is an essential step to make the transaction legally valid and enforceable.

In this guide, we will explore what stamp duty on share transfer is, when it applies, how it is calculated, the applicable rates, payment procedures and the consequences of non-payment.

What is Stamp Duty on Share Transfer?

Stamp duty is a type of tax imposed on the transfer of ownership in certain assets, including shares of a company. In the context of share transfers, it is levied on the instrument of transfer, which is generally the share transfer deed. This duty acts as proof that the transfer is duly recorded and recognised under law.

In India, the legal framework for stamp duty is governed primarily by the Indian Stamp Act, 1899, although certain states may have their own rules if the transfer pertains to physical share certificates. For dematerialised (demat) shares, the rates are uniform across the country as per central government regulations.

When Does Stamp Duty Apply?

Stamp duty applies whenever there is a change in ownership of shares, whether by sale, gift or any other mode of transfer. The key scenarios include: –

• Transfer of physical shares through a duly executed share transfer form (Form SH-4 for private companies).
• Off-market transfer of demat shares, such as gifting shares to a family member or private sale not done through a stock exchange.
• The sale of listed shares through a stock exchange, where the duty is collected electronically by the exchange.
• Transmission of shares in certain cases where the law deems it a transfer (though many transmissions, like inheritance, may be exempt).

The duty is payable by the buyer or transferee unless otherwise agreed between the parties.

Applicable Stamp Duty Rates

The rates of stamp duty vary depending on whether the shares are in physical form or dematerialised form and whether the transaction occurs through a recognized stock exchange or off-market.

1. Transfer of Physical Shares

• Stamp duty is 0.25% of the consideration amount (sale value) or the market value, whichever is higher.
• It must be paid by affixing adhesive share transfer stamps on the share transfer deed before it is signed.

2. Transfer of Demat Shares (Off-Market)

• Since July 1, 2020, the Central Government has implemented uniform stamp duty rates across India for demat transfers.
• The rate for transfer of securities is 0.015% of the consideration amount.
• The duty is collected through the depository (NSDL or CDSL) and then remitted to the respective state government.

3. Sale of Listed Shares Through Stock Exchange

• The rate is 0.015% on the value of securities (based on traded price) for delivery-based trades.
• For intraday and derivatives, different rates apply.

Calculation of Stamp Duty

To calculate stamp duty, you need: –

1. Sale Value (Consideration Price): The amount agreed between the buyer and seller.
2. Applicable Rate: Based on the type of share and mode of transfer.

Example – Physical Share Transfer

If you are transferring physical shares worth ₹5,00,000: –

• Stamp Duty will be 0.25% of ₹5,00,000
• = ₹1,250

Example – Demat Off-Market Transfer

If you are transferring demat shares worth ₹5,00,000:

• Stamp Duty will be 0.015% of ₹5,00,000
• = ₹75

Procedure for Paying Stamp Duty

The procedure differs based on whether the shares are in physical or demat form.

1. Physical Shares

1. Obtain a share transfer form (Form SH-4) from a stationery shop or company registrar.
2. Calculate the stamp duty as per 0.25% of the higher of the sale value or the market value.
3. Purchase adhesive share transfer stamps of the calculated value from an authorized stamp vendor.
4. Affix the stamps on the transfer deed and cancel them by signing across the stamp(s).
5. Submit the stamped transfer deed along with the share certificates to the company for transfer registration.

2. Demat Shares (Off-Market)

1. Instruct your Depository Participant (DP) to initiate the transfer.
2. Provide the target DP ID and client ID of the transferee.
3. The DP will calculate the applicable stamp duty at 0.015% and debit it from your linked account.
4. The DP will remit the duty to the government electronically.

Exemptions from Stamp Duty

Certain transfers may be exempt from stamp duty, such as:

• Transmission of shares by inheritance or succession.
• Transfers to a nominee upon the death of a shareholder.
• Transfers between certain government entities or under specific schemes.
• Court-approved mergers or demergers where the order specifies an exemption.

However, exemptions may vary by state and transaction type, so legal verification is essential…!

Consequences of Non-Payment of Stamp Duty

Failure to pay stamp duty can have serious consequences: –

• The transfer deed may be considered invalid and not enforceable in court.
• The company may refuse to register the transfer in its records.
• Penalties, interest and fines may be imposed.
• In case of disputes, unstamped or insufficiently stamped documents are not admissible as evidence.

It is therefore crucial to ensure proper stamping at the time of execution.

Recent Changes in Stamp Duty Rules

The Finance Act, 2019 and subsequent notifications brought in major changes effective July 1, 2020:

• Centralized collection of stamp duty on securities transactions.
• Uniform rates across all states for demat transactions.
• Depositories, stock exchanges, and clearing corporations now act as collecting agents.

This move has streamlined the process and removed discrepancies between states.

Key Points to Remember

• Always check the form of shares (physical or demat) before calculating stamp duty.
• For physical shares, duty must be paid via adhesive stamps; for demat, it is collected electronically.
• Use the higher of market value or consideration for calculation in case of physical transfers.
• Keep proof of payment as part of your transaction records.
• Confirm if any exemption applies before paying.

Conclusion

Stamp duty on share transfers is not just a legal formality, but it is an essential step in ensuring your ownership rights are recognised. Whether you are an investor, business owner, or individual shareholder, understanding the applicable rates, payment procedures and compliance requirements can save you from unnecessary disputes and penalties. With the uniform stamp duty regime for demat shares now in place, the process has become simpler, but attention to detail remains critical—especially for physical share transfers.

By adhering to the stamp duty rules, you not only comply with the law but also secure the legitimacy of your investment transactions.