Stamp Duty Goes Up For EM Letters in Kerala- Bank Loans Become Costly 

EM letters (Equitable Mortgage Letters) started attracting stamp duty in the state of Kerala from April 1, 2019 making home loans and other loans secured by immovable property costlier. Stamp duty associated with home loans and other loans extended against primary or collateral security in the form of landed property has increased in the state of Kerala on account of amendments to the Kerala Stamp Act, 1959 brought in by the Kerala government through Kerala Finance Bill, 2019.The amendment treats EM letters as agreements evidencing creation of equitable mortgage. A new article has also been added for providing for stamp duty for release deeds executed by commercial banks. 

Importance of Equitable Mortgage (EM) in bank loans      

Equitable Mortgage is the most common form of security interest creation for loans when landed or immovable property is accepted as primary security or collateral security. In the case of home loans, the land and building or building under construction or flat or flat under construction becomes the primary security. Immovable property becomes primary security when term loans are offered for construction of building or factory for MSME units or corporate. Further, in majority of cases where working capital loans are secured by hypothecation of stock in trade  or in the case of non fund based limits like Letter of Credit (LC), Bank Guarantee (BG) etc, immovable property is accepted as collateral security. Hence, immovable property is an integral part of bank loans in the entire country.

How does the amendment in Kerala Stamp Act affect EM letters?      

Creation of equitable mortgage happens with delivery of title deed in a notified town with the intention to secure a debt. However, as a practice, bank obtain  Letter of Request for original deposits and  Letter in lieu of Redeposit for enhancements or additional limits from the mortgagor as an abundant precaution as an evidence to prove the intention of the mortgagor to create the equitable mortgage.  Many states in the country have subjected such letters known as ‘EM letters’  to stamp duty.  In the state of Kerala, no stamp duty was applicable for ‘EM Letters’ so far.  With the amendments brought in Article 6 of the Kerala Stamp Act, 1959, EM Letters have become instruments evidencing agreement relating to deposit of title deeds. Therefore, EM letters attract stamp duty as per the rates specified in the said article. 

A new article [Article 48(b)] has also been inserted in the Kerala Stamp Act providing for stamp duty for release deeds executed by commercial banks. Normally, release deed in the case of EM arises for bank loans only in limited cases related to agricultural loans, educational loans etc.

How much is the stamp duty for EM letters as per the amended Kerala Stamp Act, 1959? 

The stamp duty applicable for EM letters and release deeds executed by commercial banks in Kerala with effect from April 1, 2019 is as mentioned below:

Banks in the state have started collecting stamp duty for EM letters. They have also issued necessary instructions to identify omissions, if any, in respect of mortgages created from April 1,2019 and to rectify the position.   Loan/security documents not stamped adequately would not be admissible in evidence before a Court of law.  Further, if  understamped/unstamped documents are produced before a Court of law, courts have authority to impound such documents  and impose penalty at the rate of 20 times of the stamp duty.