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Cancellation and Refund Policy

Home buyers may, sometimes, be forced to end their home-purchase journey abruptly, for reasons beyond their control. There have been several cases in the recent past, where buyers had to cancel the Property they had booked, because of the sudden loss of income due to the Coronavirus pandemic. In other cases, the buyer may have a change of mind, after discovering a problem with the property. Either way, they have to cancel the flat booking. This is a scenario that every buyer should consider, before they start their home purchase journey.

What happens when you cancel a flat booking?

What happens after you decide to cancel the booking of a flat, will depend on the terms and conditions in the builder-buyer agreement and whether or not this agreement has legal validity – i.e., whether the builder-buyer agreement has been registered. In case you have bought the property from an individual seller, the terms and conditions mentioned in the agreement to sell will come into play. It begs mention here that of a registered builder-buyer agreement or agreement to sell, all the terms and conditions will be valid, even if they are tilted in favour of the selling party. This is why reading the agreement to sell and the builder-buyer agreement is absolutely crucial.

Cancellation of flat booking and refund of token money

Typically, a buyer pays a certain percentage of the transaction value as what is popularly known in India as the ‘token money‘ or bayana. Generally, at least 1% of the deal value is paid as the token money by the buyer to the seller or the builder, when the two parties give an in-principle approval to the deal. At this juncture, the paperwork is yet to start.

In case you are buying a brand new unit in an under-construction project from a builder, by the time the builder-buyer agreement is created, the buyer has to arrange another trance of the advance payment, which is typically 10% of the property’s value, after which the document is registered to attain a legal validity. Note here that the arrangement of payment would be different in case you are buying a resale property. In this case, buyers have to typically make the payment in two tranches only.

As long as the agreement is not registered, the seller cannot deduct any money from the advance amount. If the buyer is able to negotiate well, he may be able to get his entire money refunded.

Cancellation after builder-buyer agreement is registered

From a buyer’s point of view, cancellation at this stage is costly. “Once the builder-buyer agreement is registered, the seller is legally empowered to forfeit a certain portion of this amount. Every builder-buyer agreement is written differently and depending on the terms and conditions mentioned in the agreement, the buyer will have to let go of a part of the entire amount,” says Sanjor Kumar, a Delhi-based real estate broker.

As this is a buyers’ market right now, real estate developers do not force the buyers to forfeit the entire booking amount, adds Dheeraj Nigam, a Noida-based real estate broker. “This is done as part of their brand-building exercise and to gain the consumers’ trust. Unless a buyer is willfully trying to sabotage the deal, developers are open to refunding the booking amount, as long as the reason behind the cancellation is genuine and legitimate,” maintains Nigam.

Legal remedy to claim refund for flat cancellation

If the buyer is not happy with the developer’s conduct, vis-à-vis the refunding of money, they can approach the Real Estate Regulatory Authority in their state. This can be done, if the seller is a developer and the unit purchased is an under-construction property. If you bought a resale home from an individual seller, you will have to approach the consumer court, to get your grievance addressed.

These processes take time and it is better for the buyer to peacefully negotiate with the seller, to reach a satisfactory outcome for both the parties,” opines Kumar.

Tax treatment of excess amount

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has recently ruled that if a buyer receives a sum higher than what he actually paid as the earnest deposit, he will have to pay tax on this excess income. According to the tribunal, while the excess amount will not be the same as capital receipt, it will have the same treatment as capital gains.

The order by the Mumbai tax tribunal may pave the way for other court in India to follow the same example while dealing with cases of this nature. Earlier, the income tax department had held that the excess amount earned by the buyer is “income from other sources” and should be treated as such for tax purposes.

Things to keep in mind

The buyer has no legal right over the property, till the builder-buyer agreement is registered. This is why it is important to keep everything documented and registered.
For every transaction, take a receipt form the seller and keep all such copies safe with you.
Carefully read the clause pertaining to cancellation of booking and get it changed, if you find that it is heavily in favour of the seller.
Hire a legal advisor to carry out the process, to reduce the chances of errors.

FAQs

How do I cancel my booked flat?

Cancellation of a flat booking, will depend on the terms and conditions in the sale agreement. Buyers should ensure that they read the cancellation clause carefully, before signing the agreement.

Is GST refundable on cancellation of flat?

If the developer has collected GST from you, he may or may not agree to refund this amount, as he may have already deposited this amount to the credit of the government.

Can token money be refunded?

If the buyer backs out from the deal, the seller has the right to forfeit the token money paid. If the buyer can negotiate well, he may be able to get this money back.

SC seeks govt reply on model builder-buyer agreement

Builders try to insert one-sided clauses in builder-buyer agreements that harm the interests of consumers, said the top court

Builder-buyer agreements: All you want to know
Builder-buyer agreements before RERA
Builder-buyer agreement under consumer protection law
Builder-buyer agreements after RERA
SC ruling on builder-buyer agreement
Model builder buyer agreement are a must: SC
Builder-buyer agreement must be considered as flat allotment date: SC
How to draft a builder-buyer agreement
Builder-buyer agreement format
Things buyers need to check in builder-buyer agreements
FAQ

The Supreme Court on November 8, 2021, said that a model builder-builder agreement was a matter of extreme public importance, and asked the central government to file its reply on the matter.

This is an important matter where the issue is about the need to frame a model builder-buyer agreement under the RERA. The government has the power to do so… a group of homebuyers has come to the court. This is not an adversarial matter. This is a very important issue of public interest. Kindly help us,” a bench of Justices DY Chandrachud and AS Bopanna told Additional Solicitor-General KM Nataraj, and asked him to file a reply by November 22, 2021.

The observation by the SC came after the top court was informed that the Centre had failed to file a vakalatnama in the matter. A vakalatnama is a legal document that empowers a lawyer to act on behalf of his client. Recall here that the apex court in October 4, 2021, asked the union government to come up with a model builder-buyer agreement giving an order on a public interest litigation filed by advocate and BJP leader Ashwini Upadhyay.

Promoters, builders and agents use manifestly arbitrary one-sided agreements that do not place customers at an equal platform with them, which offends Articles 14, 15, 21 of the Constitution. There have been many cases of deliberate inordinate delays in handing over possession and customers lodge complaints but the police don’t register FIRs, citing arbitrary clauses of the agreement,” Upadhyay had said in his plea.

In his plea filed through senior advocate Vikas Singh, Upadhyay had said that a model builder-buyer agreement be put in place in line with the safety promised to homebuyers under the real estate law.

The petition also added that builders issue revised delivery schedules again and again, and adopt arbitrary unfair restrictive trade practices. “All this amounts to criminal conspiracy, fraud, cheating, criminal breach of trust, dishonestly inducing delivery of the property, dishonest misappropriation of property and violation of corporate laws,” it said.

Builder-buyer agreements: All you want to know

Builder-buyer agreements, which are drafted and executed at the time of sale of an under-construction property, act as a sale agreement between the buyer and the builder. The buyer and the builder have to conclude the property transaction, based on the terms and conditions mentioned in the builder-buyer agreement, which clearly states the nitty-gritties involved in the property sale.

Builder-buyer agreements before RERA

Before the RERA came into force, builder-buyer agreements were invariably tilted in favour of the builders. A typical builder-buyer agreement would have provisions asking for 20% interest, in case of payments defaults on the part of the buyer. The penalty on the builder would be 2% interest, if he failed to deliver the project on time.

Construction timeline

The agreement would usually state that the builder will offer possession of the Property within 36-42 months from the ‘start of construction’. Nowhere would the agreement mention that this time started from the date of booking. The start of construction would be entirely up to the builder’s discretion. Some developers took the liberty to consider that construction had started only after the excavation work was completed.

Price escalation clause

This clause helped builders to raise the price of the property, as and when they needed. Even if a project had been delayed, they could raise the cost, claiming that raw material and other input costs had increased. The buyer had no way of resisting the double trouble of delay and higher costs.

Area change

The agreements also included a clause allowing the builder to change the sq ft area of the Property. In case of an increase, builders could ask for extra money from the buyers. “Even if the super area increased, you had to pay 10%-15% extra, while the benefit to you, in terms of the additional area, would be marginal or nil,” explains Anuj Sood, head of Noida-based Sood Properties.

Payment delay

Builder-buyer agreements also included a penalty clause, to be invoked if the buyer delayed in paying an installment. The charge could be hefty – as much as 18%-24%, compounded quarterly. Some developers went further and included clauses that allowed them the right to cancel the allotment and forfeit the earnest money, which could be as high as 20%-25% of the total cost, if the buyer delayed payment beyond a point. The balance would be returned, without any interest.

Payment on ‘actual cost basis’ in builder-buyer agreements

The agreements also talked about the buyer being liable to pay for certain facilities, on an actual cost basis, at the time of taking possession. The buyer would then be in for an unpleasant surprise, if the builder demanded an unexpectedly high amount for facilities such as club membership, electricity connection charge, etc. Similarly, at the time of booking, there would be no specific mention of the PLC (preferential location charges). This charge, depending on what the builder deemed fit, would be imposed on the buyer at the last minute.

Building plan changes in builder-buyer agreements

Developers often drafted the builder-buyer agreement in such a way that they enjoyed the legal freedom to change the building’s plans and get away with it without having to pay any penalty.

Transfer charges in builder-buyer agreements

This clause in agreements used to state that the buyer had to pay the developer a ‘transfer charge’, if the Property was resold before the buyer took its possession. No disclosure was, however, made about what kind of amount the buyer would have to pay.

Builder-buyer agreement under consumer protection law

A builder-buyer agreement can be termed as an unfair contract, if it breaches certain conditions as specified under Section 2(46) of the Consumer Protection Act, 2019. If the builder-buyer agreement has any of the following conditions, it would be termed an unfair contract and can be challenged in consumer courts:

Demand for excessive security deposit.
Imposing penalty for breach of contract.
Unwillingness to accept early debt repayment along with the applicable penalty.
Terms allowing the builder to end the contract without any reasonable cause.
Terms entitling the builder to assign the contract to other parties.
Terms imposing unreasonable conditions, obligations or charge on the consumer that puts him in a disadvantageous position.

Builder-buyer agreements after RERA

Read the builder-buyer agreement carefully instead of signing it blindly. In case you need legal recourse, it’s the one contract that will help you in court.

Considering that agreements that favoured builders were a key pain-point for the buyer community, the real estate law tried to address this, by laying the ground rules for drafting and executing builder-buyer agreements, referred to as agreement to sale in the Real Estate (Regulation and Development) Act, 2016. An agreement for sale, according to the law, refers to an agreement entered into between the promoter and the allottee.

Key provisions:

Builder has to submit agreement pro-forma

While registering a project, a builder has to submit, along with his application and other documents, the pro-forma of the allotment letter, agreement for sale and the conveyance deed proposed to be signed with the buyers.

Builder-buyer agreement is the guiding document

The law states that the builder will have to carry out his responsibilities as mentioned in the agreement to sale.

Clause on earnest money

A developer cannot ask for more than 10% of the property’s value from the buyer, at the time of signing the builder-buyer agreement. The parties are legally bound to register this agreement, to provide it legal validity.

Details in builder-buyer agreements

Section 13 (2) of the law prescribes that the builder-buyer agreement contain each and every detail, leaving little scope for confusion in terms of the builder’s responsibilities.

The agreement for sale shall specify the particulars of development of the project, including the construction of building and Property, along with specifications and internal development works and external development works, the dates and the manner by which payments towards the cost are to be made and the date on which it is to be handed over, the rates of interest in case of default, and such other particulars,” says the law.

Failure to provide promised amenities

If a builder has promised a certain facility in the builder-buyer agreement, he is legally obliged to provide it. If he fails to do so, the buyer can, within five years of getting the possession, point this out to him and he will have to rectify the mistake in a month’s time.

In the event of the promoter’s failure to rectify such defects within such time, the aggrieved allottees shall be entitled to receive appropriate compensation in the manner as provided under this Act,” says the law.

Even otherwise, if the promoter fails to discharge any obligations imposed on him under the terms and conditions of the agreement for sale, he is liable to pay a compensation.

Also, after the builder executes an agreement for sale, he cannot mortgage or create a charge on such property. If that were to happen, it would have no impact on the buyer whatsoever, says the Act.

SC ruling on builder-buyer agreement

Model builder buyer agreement are a must: SC

It is must to have model builder-buyer agreements to protect home buyers in India, the Supreme Court said, on October 4, 2021. The observation of the apex court came, in response to a plea where the petitioner, one advocate Ashwini Upadhyay, had argued that there should be a model builder-buyer agreement prepared by the centre, since there was no uniformity in the agreements some states had put in place.

While issuing a notice to the centre seeking its responses, the top court also observed that builders try to insert one-sided clauses in builder-buyer agreements that harm the interests of consumers.

It is very important for consumer protection, because builders try to put any number of clauses in the agreement, which common people may not be aware of. There should be some uniformity in the agreement. It is important that this (model builder buyer agreement) is achieved in the country,” the SC said on the petition which was filed in October 2020.

In his petition, BJP leader and lawyer Ashwini Kumar Upadhyay has said that the model document should be drafted in such a way that they comply with the spirit of the Real Estate (Regulation and Development) Act, 2016 (RERA) and Articles 14, 15 and 21 of the Constitution. Upadhyay also sought a direction to all states to enforce a model agent-buyer agreement.

Promoters, builders and agents use manifestly arbitrary, one-sided agreements that do not place customers at an equal platform with them, which offends Articles 14, 15, and 21 of the Constitution. There have been many cases of deliberate inordinate delays in handing over possession and customers lodge complaints but the police do not register FIRs, citing arbitrary clauses of the agreement,” the plea read.

Builders issue revised delivery schedules again and again and adopt arbitrary unfair restrictive trade practices. All this amounts to criminal conspiracy, fraud, cheating, criminal breach of trust, dishonestly inducing delivery of the property, dishonest misappropriation of property and violation of corporate laws,” it added.

Directions must be given to compensate the buyers for losses incurred due to inordinate delays on the part of promoters and to recover the money misappropriated by promoters and agents under the garb of taxes, interests, penalties and other charges,” Upadhyay said in his petition, adding that all states must enforce the model document to ensure buyer safety.

Builder-buyer agreement must be considered as flat allotment date: SC

The period of allotment of a housing unit to a home buyer has to be considered from the date of the builder-buyer agreement and not from the date of registration of the project under the Real Estate (Regulation and Development) Act, 2016, the Supreme Court has ruled. “It is relevant to note that even for the purpose of Section 18 (of RERA), the period has to be reckoned [with] in terms of the agreement and not the registration,” the apex court said.

How to draft a builder-buyer agreement

While the law makes it mandatory for the builder to follow specific rules while drafting and executing a builder-buyer agreement, the buyer still has to still show utmost caution, while reading the terms and conditions.

First and foremost, they have to make sure that the agreement is drafted in the manner and form as prescribed by the RERA and it is also registered with the state authority (this may not be the case for resale homes, or Property with less than eight units, as they do not fall under the ambit of the RERA).

Second, always take a legal expert’s help, to make sure there is no lack of clarity with regard to any term or condition in the builder-buyer agreement. This is of utmost value since it is only the builder-buyer agreement and the terms and conditions in it which would safeguard one’s interest, in case of a dispute in future.

Builder-buyer agreement format

After the RERA, builders are mandated to draft and execute the builder-buyer agreement, in line with the provisions laid under the home buyer-specific law. This point has been reiterated by various courts in India, time and again. For the convenience of our readers, we are attaching a builder-builder agreement sample, modeled by the Madhya Pradesh RERA.

Things buyers need to check in builder-buyer agreements

RERA registration
Time of project start and completion
Buyers’ right to cancel/assign the property
Refund policy
Any grace period taken by the builder
Force majeure clause
Consideration for the property and what is excluded (such as maintenance, parking, electrification charges, etc.)
Payment timeline
Property particulars like fixtures, clear title, jurisdiction/arbitration clause

FAQ

What is builder buyer agreement?

A builder-buyer agreement is a legal contract that contains the terms and conditions that the buyer and the builder have to comply with.

Is builder buyer agreement mandatory?

To safeguard one’s interest, the builder-buyer agreement should be executed and registered after payment of the booking amount.

Is unregistered sale agreement valid?

An agreement to sell that is not registered is not admissible as evidence in the court of law.

COVID-19: How to accept token money online?

For property agents/sellers, the deal is sealed when the home buyer agrees to pay the token money but how do you accept it online with no physical documents to seal the deal? Housing.com News tells you the nitty-gritty of accepting the token money online

With the lockdown to deal with the Coronavirus pandemic being extended in the country till May 3, 2020, real estate transactions will continue to be technology-driven across markets. From digital site tours to video walkthroughs, investors are currently adhering to social distancing norms, while making the most of the economic halt. Since negotiations are on the table, deals with 100% refundable booking amount are luring buyers who are seeking to own a home and have the cash to spend. For property agents/sellers, the deal is sealed when the home buyer agrees to pay the token money but how do you accept it online with no physical documents to seal the deal? Housing.com News tells you the nitty-gritty of accepting the token money online.

Use official email IDs to communicate

Use your official email ID to acknowledge the payment received as token money. Since the amount has been sent to the builder’s account, you have to mention that the acknowledgment is subject to the confirmation/realisation from the builder’s accounts department.

Mention the expected turnaround time

Do mention the expected timeline for receiving a reply from the builder’ office, which could be up to 7-10 working days. Inform the buyer about any delays in response, arising from the limited workforce due to the COVID-19 pandemic. Also, tell the buyer that once the developer confirms the payment, he will directly send the confirmation to them on the registered email-ID.

Spell out the clauses clearly

This is a difficult time and buyers will be extra cautious, while investing right now. Therefore, you should mention some of the clauses very clearly, to avoid future problems. Suppose, if you are offering a refundable deal, mention that clearly and also the terms and conditions related to it. This includes last date of cancellation, agreed price and payment information.

Ask for proof of payment transfer

If, by any chance, the buyer has not attached the proof of NEFT/RTGS payment in the mail, ask for the transaction ID and the online slip/screenshot of the payment confirmation. This should be done in a single mail thread, to avoid multiple emails with similar communication. Also, confirm the total amount paid as a token, to avoid discrepancies.

Formalities after the Coronavirus lockdown is lifted

Once the lockdown is over, you can send the application form (Expression of Interest) to the buyer, which has to be filled manually and has to be submitted to the builder’s office. Other documents including MoU, payment receipt, etc., can be also sent once the EOI is sent to the builder. The sale agreement can be drafted accordingly and can be signed, once everything gets back to normal.

What is token money?

Once a home purchase deal is finalised between a buyer and a seller, a formal process is initiated to conclude it legally. This starts with the buyer paying the seller a small portion of the transaction value, to show his genuine intentions. This payment, in Indian real estate parlance, is commonly known as the ‘token amount’.

In the northern region, this payment is known as bayana (बयाना). The term bayana basically denotes the advance payment that the buyer has already made, to show the seriousness of his intent in purchasing the property. It is a certain percentage of the deal amount that the buyer pays to the seller, in good faith.

The payment and receipt of this token amount is a standard practice, irrespective of the type of property or deal value.

Since the buyer pays this money to show his genuine interest in the property, this amount is also referred to as the ‘advance deposit’ or ‘earnest deposit’. Other terms used are ‘binder’ or ‘good faith deposit’.

When is token money paid?

The token money is paid when the buyer and seller reach a verbal agreement to conclude the deal. At this stage, the paperwork is yet to start. While there are no written rules about it, another standard practice in India’s real estate market, is that the sellers get to forfeit the entire amount, if the buyer backtracks from his verbal promise. The seller, on the other hand, will have to return the token money to the buyer, if he cannot complete the transaction, because of any reason.

How much money has to be paid as token amount?

There are no fixed rules pertaining to the amount that the buyer has to pay to the seller, as token money. This amount differs from case to case. “A buyer pays a part of his down payment for the property as the token money, in case he is buying the property from a developer. So, if a buyer plans to pay Rs 10 lakhs from his own pocket for the purchase of a property that is worth Rs 50 lakhs, he would typically give the developer Rs 1 lakh as the token or booking amount,” explains Gaurav Singhal, a Delhi-based property broker.

It is pertinent to note here that the token amount is only a part of your down payment and the two terms cannot be used interchangeably. The down payment is the amount you pay upfront to buy a property. The token amount is just a part of it.

Can token money be refunded?

If, for any reason, the buyer fails to complete the transaction, the seller would forfeit the token money, unless the parties have made a notarised agreement stating otherwise. “The token amount is usually paid by the buyer to the seller, directly after the verbal commitment. At this stage, most buyers fail to pay attention to the paperwork, since it seems like an unwanted hassle. However, a notarised document would come handy, as proof that the token money has been paid to the seller and also lay the ground rules for the purchase,” says Manoj Kumar, a Delhi-based lawyer who specialises in property registrations.

However, as this document does not have a legal validity, because it has not been registered, it mostly acts as a proof of payment, rather than a legal document that could be produced in court, in case of a dispute. The buyer and the seller enter into a registered contract, only when the buyer pays at least 10% of the deal value and a builder-buyer agreement or an agreement for sale is signed between the two parties.

How to pay token money?

As there is hardly any way to ensure refund of the token money, in case the property purchase fails, the buyer must keep the token amount as low as possible and commit to a seller, only after making all monetary arrangements to complete the transaction. For example, it could be risky to pay the token money, unless the bank has approved your home loan application.

Ascertain the credibility of the seller before paying the token money and avoid making the payment in cash. If you pay the token money through banking channels, the seller would not be able to prove otherwise

What is Bayana?

Elaborated below is all about Bayana, also known as agreement to sell

Table of Contents

What is Bayana?
Is Bayana different from token money?
What is Bayana agreement?
Is Bayana refundable?
Is Bayana a legal document?
FAQs

Once a buyer and seller reach a verbal agreement to enter into a contract, regarding the purchase of an immovable property, a process starts to formalise the deal. Among the many crucial stages of a property transaction is the signing of the agreement to sell, also often referred to as the agreement to sale or sale agreement. In India’s eastern and northern states, which includes Uttar Pradesh, Bihar, Jharkhand, Punjab, Rajasthan, Delhi, Haryana and Punjab, this agreement is known as Bayana agreement.

What is Bayana?

The term Bayana (बयाना) basically denotes the advance payment that the buyer has already made, to show the seriousness of his intent in purchasing the property. It is a certain percentage of the deal amount, also known as token money that the buyer pays to the seller in good faith.

Is Bayana different from token money?

Bayana is the Hindi term for token money. However, there are two types of token money or Bayana that a buyer pays to the seller during the property purchase.

Bayana after verbal agreement: While the exact amount may differ, buyers in India typically pay 1% of the deal value as the Bayana, as soon as they strike a deal with the seller. Since no documentation has yet taken place, neither party is liable to pay any penalty, if the deal falls through. In such a scenario, the seller will typically return the amount to the buyer.

Bayana after initial documentation: After paying the initial token amount, both parties start to formalise the transaction by way of execution of the agreement to sale or agreement to sell. Under the existing laws, this document, based on which the future transaction will take place, needs to be registered by the parties concerned. While signing the document, the buyer will pay another part of the deal value, as advance or Bayana. This may be between 10% and 30% of the deal value. The remaining amount is paid to the seller during property registration.

What is Bayana agreement?

A document that acts as the blueprint for the future sale of a house, is known as Bayana agreement or agreement to sell. Along with other things, this document clearly mentions the payment that the buyer has made to the seller so far, to stop him from entertaining any other buyer and to book the property in the buyer’s name. Registered under the Indian Contract Act, 1872, the Bayana agreement is legally binding on both the parties. Once a seller has taken the Bayana and a Bayana agreement has been signed between the two parties, both the parties are obliged to abide by the terms and conditions stated in the agreement.

Is Bayana refundable?

While the initial token amount may or may not be refunded, if a deal falls through in the absence of a written document, advances paid to the seller after the signing and registration of the Bayana agreement have to be refunded to the buyer in case the seller in unable to proceed with the sale, because of an issue on his part.

Is Bayana a legal document?

As the document is governed under the Indian Contract Act, 1872, the Bayana agreement is a legal document, which can be admitted as legal proof in the court of law, in case of any dispute between the contracting parties.

FAQs

Is Bayana agreement the same as agreement to sell?

In several eastern and northern Indian states, the agreement to sell is known as the Bayana agreement.

What is token money in real estate?

Token money is the amount the buyer pays to the seller, after reaching an agreement to enter into a property transaction.

What do you mean by agreement to sell?

An agreement to sell is a legal document, which sets the terms and conditions on the future transaction of a property. Apart from other things, it also clearly mentions the amount that the buyer has paid the seller so far.

Token money, GST and stamp duty refund: How is money refunded when a property deal is cancelled?

What are the financial and income tax consequences that follow, if a property deal is called off or cancelled?

Table of Contents

How is token money taxed?
Refund of stamp duty paid
Refund of GST (Goods and Services Tax)
Word of caution
FAQs

Property deals need not always culminate in the execution and registration of an agreement. Sometimes, the deal may be abandoned halfway, after the payment of token money or even after some of the payments have been made. The deal may be cancelled by either the seller or the buyer, for any reason. The seller may change his mind midway about the transaction, because he finds a better offer. The buyer may have to let go his plans to move ahead with the purchase, because of unforeseen circumstances that impact his earning capacity. In some other cases, the buyer may not be able to secure a loan to go ahead with the purchase. In other words, there may be a wide variety of reasons for which a deal may fall through.

This can trigger in number of questions in the mind of buyers, who have paid a certain percentage of the property value as advances:

Will the seller refund my money?
If so, will he refund all the money or would he make some deductions?
What should I do if, the seller refuses to refund the advance money?
Am I legally obliged to let go of the token amount?

We try to answer all of these questions in this article.

Even if a deal falls through, this is no reason for buyers to lose heart, since the seller will be responsible to refund the money they might have taken from you as the ‘token money’, as along as he is responsible for the deal falling through. Also, the terms and conditions about the refund process must be laid in the initial agreement to sell, so that no confusion remains on the subject of refund, if a deal were to fall through.

How is token money taxed?

In case of deals for the purchase of any real estate, the buyer generally pays some amount as token money, when the other terms and conditions for the transfer of the property are agreed upon. The amount of token money may vary, from being merely a token to a substantial percentage of the value of the property. If the seller backs off from his commitment to sell his property, there are no immediate financial implications, except that the buyer gets a right to file a suit for specific performance in the courts of law. However, this is generally not resorted to.

If the buyer backs out from the deal, the seller has the right to forfeit the token money paid. With respect to such forfeited token money, the buyer cannot claim any income tax benefit, as this is treated as a capital loss under the tax laws. However, the advance money/earnest money that is forfeited, becomes an income of the seller in the year in which the deal is called off. Such forfeited earnest money is taxed under the head ‘income from other sources’ and not under the head ‘capital gains’, even though the income is received with respect to a capital asset. Before the amendment of the law in 2014, the amount of forfeited earnest money was required to be deducted from the cost of acquisition of the asset with respect to which it was received, in the year in which the asset, which is the subject matter of the deal, was sold.

Refund of stamp duty paid

Generally, for all property transactions, the buyer has to pay certain amount as stamp duty. This is either a fixed amount or a percentage of the property’s market value. You also have to pay registration charges, for registration of the agreement. The stamp duty rates and registration charges payable, are determined by the respective state governments. So, the rules for refund of stamp duty that is paid for property transactions, would vary from state to state. You are required to pay the stamp duty before the execution of the document.

In Maharashtra, you are entitled to claim refund of the stamp duty, within six months from its payment, in certain situations. You can claim the refund of stamp duty paid on such instrument, if the same has not been executed. The government deducts 1% of the stamp duty, subject to a minimum of Rs 200 and a maximum of Rs 1,000 of the stamp duty paid.

In case of cancellation of a deal for the purchase of a property and for which the agreements have already been registered, the Maharashtra government allows a longer period of two years from the date of the agreement, for claiming the refund of the stamp duty, subject to certain conditions. This refund is allowed, only if the developer fails to hand over possession of the property booked and this fact, as the reason for cancellation of the deal, is mentioned in the cancellation deed. The rules also provide that the cancellation agreement should be registered.

The buyer of the property can get a refund of 98% of the stamp duty, if an application is made for a refund of the stamp duty. With the refund application, you are required to attach the original agreement, as well as the original cancellation deed, with both the documents being registered. However, you will not get a refund of the registration charges.

Refund of GST (Goods and Services Tax)

When you book an under-construction property, as per the existing laws, the developer levies a GST on the agreement value, at a certain rate. This rate will depend on whether the property falls under the ‘affordable housing’ category or not and also on whether the developer is availing of the input credit. For any reason, if you want to cancel the booking and thus, surrender your rights over the under-construction property, the builder may agree to refund the booking amount and instalments paid, or even agree to pay a higher amount to you, depending on the demand and supply dynamics at that time. Although the developer may have collected GST from you, he may or may not agree to refund this amount, as he may have already deposited the amount to the credit of the government. The builder will not be entitled to claim any refund with respect to the GST, as he has already rendered services to you.

In case you enter into an agreement to transfer your rights in the under-construction property to a third party, with the developer being the confirming party, your sale price would be inclusive of the GST and you will not be able to separately recover or charge any GST on such transaction. While computing the capital gains, the GST that is already paid by you, will form part of the cost of acquisition. The capital gains will be taxable as long-term, if your holding period has been three years, or else, the profits, if any realised, will be taxed as short-term capital gains.

Word of caution

As it is possible that the property deal may not move in the direction you intended it to, buyers must keep in mind certain points, to safeguard their interests. The first step in that direction, is to avoid paying any money in cash. If money is paid in cash, the seller might later refuse to return the money, if there is no legal proof that you made the payment.

Also, every effort should be made to avoid any dispute during the process. While buyers have several legal recourse available to seek relief, the process to claim that relief is often long drawn and monetarily expensive. In your best interest, sit across the table and discuss the matter with the other party. They too, surely, do not want to be dragged to the courts, which would result in them losing time and money.

Unless you have been dealing with an absolutely honest party, you run the risk of losing time, money and energy, if you depend solely on verbal commitments, without giving this commitment a legal form by way of documentation. This is why buyers must always insist on getting everything in written at every juncture of the transaction.

FAQs

Is Stamp Duty refundable on cancellation of flat?

Is GST refundable on cancellation of flat?

Although the developer may have collected GST from you, he may or may not agree to refund this amount, as he may have already deposited the amount to the credit of the government.

Is token money received taxable for the seller?

The advance money/earnest money that is forfeited, becomes an income of the seller in the year in which the deal is called off. Such forfeited earnest money is taxed under the head 'income from other sources' and not under the head 'capital gains', even though the income is received with respect to a capital asset.

Refunds Policy

If you are eligible for refunds based on the “Cancellation and Refund” policy above, then the refund will be remitted back to you in 5-7 working days. In case of any issues, write to us at shyambabagroup@gmail.com or call us on +91 9001602012