Buying a house is one of the most important financial choices anyone can make in their lives. It is a daunting financial as well as emotional experience where we need to recognise the property during the purchase of a home, make a down payment, apply for loan, sign the selling agreement etc. Thereafter comes the possession which is the actual transfer of the property but this is not enough as we will need to provide patented legal proof. To do this, you would need to get the property registered in the local municipal records in your name, with the seller reporting that the property is being sold. You’ll also have to pay a stamp duty at the time of registration which is a government tax imposed on property transactions.
A lot of people however prefer not buying their own house due to various reasons as it suits their own financial ambitions and the lifestyles that they enjoy. Owning a home leaves you vulnerable to unexpected spending and distractions nibbling away at what’s available for investment. It can also restrict your mobility and your independence.
With leasing, you’ve got a planned, stable cost that you can schedule throughout the year. You wouldn’t have to neglect or skip job opportunities that come your way.
So, when you’re looking for or living in a rented house, apartment, or home, the same needs to be registered and stamp duty needs to be paid on it.
Stamp duty on lease agreements
Stamp duties are payable pursuant to Section 3 of the Indian Stamp Act, 1899. It is a tax paid to the government, similar to the income tax. Stamp Duty is payable in full and is to be paid on the deadline. If payment of the stamp duty is delayed, it will incur a fine. A stamp duty paying instrument or document is deemed to be a legitimate and legal document and can be admitted as evidence in court. Any document that is not appropriately stamped, cannot be admitted as evidence in court.
Stamp duty shall be paid in the manner specified by the applicable stamp laws of the State in India where the property is situated for the execution of any lease agreement. According to the Constitution of India, the stamp duty on such instruments is a ‘state issue’ and therefore the applicable stamp duty can vary from state to state.
In general, the stamp duty is paid on the basis of the term of the contract, the amounts of the rent, the premium, and/or any other form of rent and premium that may be specified in the proposed lease agreement. Minimum circle rates were also defined by the respective State Governments in some Indian states. In such states, either the specific rent specified in the lease agreement or the minimum circle rates provided by the applicable state government which will be much higher are expected to be paid stamp duty.
Why are rent agreements registered
Section 17 of the Registration Act 1908 makes it compulsory to register a lease agreement Section 17(1)(d) leases of immovable property from year to year, or for any term exceeding one year, or reserving a yearly rent;
This makes it imperative that immovable properties from year to year or for any period exceeding twelve months require compulsory registration at the office of the Assurance Sub-Registrar with jurisdiction over the place where the property to be leased is located. Both the parties i.e. the tenant and the landlord must be present together with two witnesses for attestation in order to register the deed. If all parties are not present together, he/ she must sign the Power of Attorney, giving the agent the authority to sign the agreement.
The Registration Act, 1908 makes an instrument that requires mandatory registration to be registered within four months from the date of its execution The Registrar can, at his discretion, issue an extension of an additional four months by imposing a penalty of up to ten times the registration fee, given that such failure to present the instrument within the first four months.
Apart from the mandatory requirement that a lease agreement should be registered it also forms an important aspect in a landlord-tenant relationship. It not only facilitates the relationship between the parties but also preserves their interests. The landlord and the lessee must never compromise for an oral contract as it is not protected by statute, and should thus always rely on a written agreement being enforced.
Why is the rent contract for 11 months
We must have noticed that mostly rent agreements are made for 11 months. We may even wonder why that is so. This is mainly done so that the stamp duty and other charges could be avoided. Under the Registration Act, 1908, registration of a lease agreement is compulsory if the lease term extends 12 months. If an agreement is registered, the parties will have to pay stamp duty and the registration fee. If the agreement is made for 11 months it could save a few extra bucks and the time that the entire process of registration would take.
Stamp duty on rent agreement in UP and Gujarat
The provisions of the Registration Act, 1908 makes it imperative that all the Rental Agreements are registered if you are making it for more than one year.
The stamp duty payable is governed by The U.P. Stamp Act, 2008.
The stamp duty to be paid on rental agreements are as follows:
- If the lease is to be for a term not exceeding three years; then the Stamp Duty will be 2% of the Annual Rent.
- where the lease is for a term exceeding three years but not exceeding five years then the stamp duty will be 2% of consideration equal to three times the amount or value of the average annual rent reserved.
- where the lease is for a term exceeding five years but not exceeding ten years; then the stamp duty will be 2% of consideration equal to five times the amount or value of the average annual rent reserved.
- where the lease is for a term exceeding ten years but not exceeding twenty years; then the stamp duty will be 2% of consideration equal to ten times the amount or value of the average annual rent reserved.
- where the lease is for a term exceeding twenty years but not exceeding thirty years or does not purport to be for any definite term; then the stamp duty will be 2% of consideration equal to twenty times the amount or value of the average annual rent reserved.
- where the lease is for a term exceeding thirty years or in perpetuity; then the stamp duty will be the same as a duty for Conveyance for a consideration equal to the market value of the property which is the subject of the lease.
Registration of the agreement
Once the agreement is made and signed and if the lease is for less than a year then the document can be attested from the Notary Public and if the lease is for more than a year then it needs to be registered at the Local Sub-Registrar to make it legally enforceable in case of a dispute. A Registered rental agreement retains more evidentiary force compared to Notarized rental agreement.
Documents required for the registration process
- One Original Identity Proof of Owner and Tenant.
- Two Passport Size Photograph of each-Owner and Tenant.
- Two Witnesses with their Original Identity Proof.
The stamp duty payable in the state of Gujarat is governed by the Gujarat State Stamp Act, 1958, which was based on the Bombay Stamp Act, 1958.
- If the lease is made for a term which is between 1 – 5 years then the stamp duty payable will be 1.50% of the average annual rent reserved.
- If the lease is made for a term which is between 1 – 10 years then the stamp duty payable will be 3% of the average annual rent reserved.
- If the lease is made for a term which is between Lease deed 1 – 15 years then the stamp duty payable will be 6% of the average annual rent reserved.
- If the lease is made for a term which is between 1- 20 years then the stamp duty payable will be 6% of the average annual rent reserved.
- If the lease is made for a term which is above 20 years then the stamp duty payable will be 6% of the average annual rent reserved.
Registration of the agreement
A rental agreement written on a Stamp paper is not enforceable if not registered at a Sub-Registrar Office. Thus, one is required to record the same with a Sub Registrar office to make it legally enforceable in case of a dispute.
When a rental agreement is signed, both the landlord and the occupant should maintain full fairness in the best interests of both the parties.
The rental agreements can be registered after the occupant moves in but should not be postponed anyway. The agreement can be registered either online or physically at the sub registrar’s office in Gujarat.
The Documents required for the registration process in Gujarat is the same as those required in Uttar Pradesh as elaborated above.
If we look at all the applicable laws in the country, we can see that for all agreements to be valid and enforceable in the courts of law they need to be attested and stamped appropriately executed. The same tax, however, would be as under the laws of the respective State. Where e-stamping facilities are provided for by State legislation, the same shall be used to advance towards the aim of a paperless economy. Whereas the value and legitimacy of e-agreements and e-stamping has yet to be accepted by some Governments. Both the state and central government are looking forward to making clear arrangements for e-agreements and e-stamping with a view to saving time and money and making business simpler.
The Indian Stamp Act, 1899.
The Registration Act 1908.
The U.P. Stamp Act, 2008.
The Gujarat State Stamp Act, 1958.
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