Stamp Duty on Share Transfers and Gifts: Physical and Demat Shares

Stamp Duty on Transfer and Gift of Shares in India: Rules for Physical and Demat Holdings

Brief: The securities stamp duty amendments effective from 1 July 2020 introduced uniform rates for share transfers across India. A transfer of shares on a delivery basis for consideration generally attracts duty at 0.015% of the consideration, whether the permitted transfer takes place through a depository or by a physical instrument. The Department of Economic Affairs has expressly clarified that an off-market transfer of securities without consideration, such as a gift, does not attract securities transfer stamp duty. For a gift of physical shares through Form SH-4, the same result follows from applying the amended Act’s consideration-based valuation provisions, although the published FAQ does not expressly address physical gifts. A separately executed gift deed requires its own stamp duty review. The parties must also check whether dematerialisation is mandatory before attempting a physical transfer.

1. What changed on 1 July 2020?

The Finance Act, 2019 amended the Indian Stamp Act, 1899, and the relevant securities stamp duty provisions took effect on 1 July 2020. The amendments established uniform rates for specified securities transactions and separate collection mechanisms for transactions through stock exchanges, clearing corporations and depositories, and for transactions outside those systems.

For shares transferred on a delivery basis, the relevant rate is 0.015%. For a non-delivery-based transfer of a security other than a debenture, the specified rate is 0.003%. The applicable rate does not change merely because the parties execute the transfer in Delhi, Haryana, Maharashtra or another State.

2. Relevant legal provisions

• Indian Stamp Act, 1899, section 2(16B): defines “market value” for securities transactions by reference to the price or consideration specified for the relevant transaction.
• Section 9A: governs collection of duty on specified securities transactions through a stock exchange, clearing corporation or depository.
• Section 9B: governs duty on specified securities transactions otherwise than through those channels, including relevant physical transactions.
• Section 21: provides the valuation rule for charging duty on instruments relating to securities.
• Section 29: identifies the person who bears the expense of stamping in the absence of an agreement to the contrary. The applicable clause depends on the transaction route.
• Schedule I, Article 56A: specifies the rates for securities other than debentures, including delivery-based and non-delivery-based transfers. Article 62(a) should not be cited as the current rate-setting entry for share transfers: the amended central Schedule directs these transactions to Article 56A.
• Companies Act, 2013, section 56, read with Rule 11 of the Companies (Share Capital and Debentures) Rules, 2014: governs registration of a transfer of securities held in physical form using Form SH-4, subject to the statutory requirements and exceptions.
• Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014: imposes dematerialisation requirements on covered private companies and their security holders, subject to the rule’s scope and applicable compliance timeline.

3. Sale of physical shares through Form SH-4

Where a physical transfer is legally permissible, a sale of shares for consideration is documented through a duly executed Form SH-4. The delivery-based securities transfer rate is 0.015% of the relevant consideration. Because the transaction does not pass through a stock exchange or depository, the parties must arrange payment of the applicable duty through an available, legally recognised stamping method before lodging the instrument with the company.

Section 29 should be checked for the particular instrument and transaction. The parties may also agree between themselves who will bear the expense of stamping. The draft’s unqualified statement that the transferor always bears duty on a physical transfer is therefore too broad.

Section 56 generally requires the executed, duly stamped transfer instrument to be delivered to the company within 60 days of execution, together with the relevant share certificate or letter of allotment, as applicable. Before using SH-4, the parties must check whether the company and the holder are subject to a dematerialisation requirement.

4. Sale of demat shares

The parties should state the true consideration and correctly classify an off-market transaction in their depository instructions. A transfer should not be described as a gift merely to avoid duty.

5. Is stamp duty payable when shares are gifted?

5.1 Gift of demat shares

The Department of Economic Affairs’ published FAQ expressly answers “No” to whether stamp duty is charged on an off-market transfer of securities without consideration, including a gift or legacy transfer. It explains this conclusion by referring to section 21 read with section 2(16B) of the amended Indian Stamp Act. Accordingly, a genuine off-market gift of demat shares without consideration does not attract securities transfer stamp duty. The donor should select the appropriate gift reason in the depository process and retain supporting records.

5.2 Gift of physical shares

Where a physical transfer remains permissible, the donor and donee may use Form SH-4 to effect a gift of physical shares and should clearly record that no consideration is payable. On the amended Act’s consideration-based valuation approach, the author’s view is that no securities transfer stamp duty is computed on a genuine physical gift without consideration. However, the Department’s FAQ specifically discusses off-market transfers and does not separately set out a procedure or example for a physical SH-4 gift. Parties dealing with a material physical holding should verify the stamping and registration requirements with the company and, where necessary, the relevant stamp authority before execution.

Separate gift deed: If the parties also execute a gift deed, it is a distinct instrument. Its chargeability and rate, if any, must be examined under the stamp law applicable to that deed. The nil-duty treatment discussed above for a securities transfer should not automatically be extended to a separate deed.

6. Can a private company still register a physical transfer?

Rule 9B applies to private companies other than small companies, subject to the rule’s terms and applicable compliance dates. Once the relevant requirements apply, a security holder intending to transfer securities must first dematerialise them. A physical SH-4 route should therefore be used only after checking the company’s status, the relevant date, any applicable exemption and the current regulatory position. A company’s description as “private” does not, by itself, establish that a physical transfer remains available.

7. Practical comparison

8. Example

Assume that A transfers 5,000 shares to B for ₹10,00,000 on a delivery basis and genuinely gifts another 5,000 shares to A’s son without consideration. On the sale, stamp duty at 0.015% × ₹10,00,000 = ₹150, subject to the applicable transaction and collection rules. The genuine off-market demat gift attracts no securities transfer stamp duty under the Department’s FAQ. If the gifted shares are physical, the parties should apply the physical-transfer analysis above and first confirm that a physical transfer is permitted.

The income-tax treatment is a separate question. A receipt from a qualifying “relative” may fall within the exception under section 56(2)(x) of the Income-tax Act, 1961, subject to its conditions. Gifts involving non-relatives, non-residents or other special circumstances require their own income-tax and, where relevant, FEMA review.

9. Frequently asked questions

Q1. Does the share transfer stamp duty rate differ between Delhi and Haryana?

No. The amended central securities stamp duty framework specifies uniform rates. The place of execution alone does not change the rate under Article 56A. A separately executed deed must be considered on its own terms.

Q2. Is Form SH-4 needed for a gift of physical shares?

Where a transfer of physical shares is legally permissible and no statutory exception applies, Form SH-4 is the prescribed transfer instrument. The parties should record the gift and nil consideration accurately and comply with section 56 and Rule 11.

Q3. Does the Department’s FAQ expressly confirm the position for physical gifts?

No. Its express clarification concerns off-market transfers without consideration. The position for a physical SH-4 gift stated in this article is an interpretation of the amended valuation provisions, and the physical stamping procedure should be confirmed for the transaction.

Conclusion

The delivery-based rate on a share transfer for consideration is generally 0.015% under the uniform securities stamp duty framework effective from 1 July 2020. The Department of Economic Affairs expressly confirms that a genuine off-market gift of demat securities without consideration does not attract stamp duty. The same nil result for a physical SH-4 gift rests on the consideration-based interpretation set out above and calls for a check of the physical stamping process. Before execution, parties should also verify whether dematerialisation is mandatory and assess any separate gift deed, income-tax or FEMA implications.

Author: CS Divesh Goyal, Goyal Divesh & Associates, Company Secretary in Practice, Delhi. Email: [email protected]