Stamp duty is basically a tax levied by state governments on certain instruments (not on transactions). And, the term "instrument" encompasses agreements, exchange deeds, gift deeds, power of attorneys, indemnity bonds and conveyances.
How does it differ from registration ? While stamp duty is payable at the time of registration, the two are quite different. Stamp duty is revenue earned by the government on execution of instruments but registration charges are collected for keeping the records of the documents. All documents creating rights in immovable property require compulsory registration.
Registration refers to the recording of the contents of a document with a Registering Officer appointed by the state government. He preserves copies of the original document. The sole purpose being to conserve evidence and assurance of title and prevent fraud. Hence, it safeguards your interest as a buyer. Also, the Stamp Act varies between states but the contents of the Indian Registration Act, 1908 are common across the country. Though, registration fees may differ across states.
How much does it amount to ?
Stamp duty is always a percentage of the market value of the property. Moreoever, this percentage varies between states. For instance, in Bangalore it varies as per the slab of property value while it is 10% in Rajasthan and 5% in Calcutta. In Maharashtra, the rates depend on the slab of property value. Take the case of residential flats purchased in a co-operative housing society or an apartment owners association.
If the cost of the transaction is between Rs 1 - 2.5 lakh, the stamp duty is 0.5% of the sale value.
If the cost of the transaction is between Rs 2.51 - 5 lakh, the stamp duty is Rs 1,250 + 3% (above Rs 2.5 lakh)
If the cost of the transaction is between Rs 5.01 - 10 lakh, the stamp duty is Rs 8,750 + 6% (above Rs 5 lakh)
If the cost of the transaction is above Rs 10 lakh, the stamp duty is Rs 38,750 + 8%(above Rs 10 lakh)
The purpose of it ?
The payment of proper stamp duty on instruments bestows legality on them. This means that they can be admitted as evidence in the court of law. An instrument not properly stamped doesn't have this privilege. Registration is extremely important too. If a document has to be compulsorily registered under Section 17 of the Registration Act and has not been so, it cannot be produced as evidence in a court of law. As a potential buyer, always check if the property has already been registered under the seller's name. Also, it is a way to check if the title deeds of a particular property have been deposited with any person or a financial institution for the purpose of obtaining an advance against the security of that property.