By The initial financial transaction in Indian real estate—often termed token money, booking amount, or application fee—creates the first legal binding between a buyer and a seller. Before the Real Estate (Regulation and Development) Act, 2016 (RERA), promoters frequently demanded 20% to 50% of the property value upfront, often without a written contract, leaving buyer capital exposed to significant risk.
Today, a rigid legal framework governs this exchange. RERA Section 13 prohibits accepting more than 10% of the cost without a registered agreement, while the Income Tax Act monitors the source of funds through Section 269SS and Section 194-IA. This guide examines the statutory limits on advance payments, the critical difference between “earnest money” and “part payment” defined by Supreme Court precedents, and the distinct tax obligations for resident versus NRI transactions.
The Legal Architecture of Advance Payments in Indian Real Estate
Buying property in India is a chronological process. It rarely happens in a single day. At the start of this journey lies the “Advance Payment.” People call it token money, booking amounts, or application fees. This initial transaction creates the first legal link between a buyer and a seller.
Before 2016, the market operated loosely. Developers often demanded 20% to 50% of the property cost before signing any papers. This trapped buyer capital. The Real Estate (Regulation and Development) Act, 2016 (RERA), changed this dynamic. Today, a mix of RERA, Income Tax laws, and Contract Acts governs how you pay this money.
The 10% Ceiling: RERA Section 13
RERA prevents promoters from collecting large sums without accountability. Section 13 establishes a strict quantitative cap.
This rule requires three things to happen simultaneously once the 10% threshold is crossed: the payment limit is observed; a written agreement is drafted; and that agreement is registered. Oral understandings do not protect you here.
Consequences of Violation
If a developer breaks this rule, the penalties are severe. Section 61 allows for a penalty of up to 5% of the project cost. Section 59 can lead to imprisonment for up to three years. Authorities like H-RERA actively enforce this to stop builders from using one-sided documents.
Fiscal Hygiene: Cash vs. Digital
While RERA watches the percentage, the Income Tax Act watches the method. The government strictly monitors cash in real estate to curb black money.
Section 269SS Prohibitions
You cannot accept a loan, deposit, or “specified sum” in relation to immovable property in cash if the amount is ₹20,000 or more. This “specified sum” covers advance payments.
| Transaction Type | Cash Limit | Consequence of Breach |
|---|---|---|
| Taking Advance | < ₹20,000 | Penalty equal to amount taken (100%) |
| Refunding Advance | < ₹20,000 | Penalty equal to amount refunded (100%) |
| Sale Consideration | < ₹20,000 | Penalty equal to amount taken |
If a seller takes ₹2 Lakhs in cash, the penalty is ₹2 Lakhs. The law requires account payee cheques, bank drafts, or electronic clearing systems like NEFT or UPI.
The TDS Mandate: Section 194-IA
Many buyers incorrectly assume Tax Deducted at Source (TDS) only applies at the final registration. However, Section 194-IA of the Income Tax Act mandates deduction at the time of credit or payment, whichever is earlier.
If the total property value exceeds ₹50 Lakhs, you must deduct 1% TDS on every installment paid, including the advance token money.
You agree to buy a flat for ₹80 Lakhs. You pay a token advance of ₹5 Lakhs.
Action Required: You must deduct 1% (₹5,000) from the token amount. You pay the builder ₹4.95 Lakhs and deposit ₹5,000 to the government via Form 26QB. Failure to do so attracts interest at 1% to 1.5% per month on the unpaid tax.
The Rate: 20% (plus applicable Surcharge and Cess), often totaling over 23%.
TAN Requirement: Unlike resident deals, buying from an NRI requires the buyer to obtain a TAN (Tax Deduction Account Number). Using Form 26QB is a procedural error in these cases.
GST on Advance Payments
For under-construction properties, the Goods and Services Tax (GST) applies to the advance payment. Unlike the pre-GST era where service tax was complex, the current regime is straightforward but immediate.
- Liability: The liability to pay GST arises at the time of receipt of the advance.
- Builder’s Duty: The developer must issue a “Receipt Voucher” upon receiving the advance, showing the GST breakdown.
- Rate: Typically 1% for affordable housing and 5% for other residential properties (without Input Tax Credit).
The “Expression of Interest” (EOI) Trap
Before obtaining a RERA registration number, developers often launch a “Pre-Launch” or “Soft Launch” phase. They ask buyers to pay an “Expression of Interest” (EOI) amount to secure a priority number. This is a legal grey area.
The Risk: Money paid as EOI is not deposited into the statutory RERA Escrow Account (70% account) because the project isn’t registered yet. If the project fails to get approval, your money is sitting in the builder’s current account, vulnerable to diversion.
The “Application Form” Legal Vacuum
Before the formal Agreement for Sale, developers often ask buyers to sign a preliminary “Application Form” or “Allotment Letter.” This document is dangerous because it often contains one-sided terms that the buyer carelessly accepts.
Common predatory clauses include:
- “Booking amount is non-refundable.”
- “Cancellation attracts 20% deduction.”
- “Builder reserves right to change floor plan.”
Legal Reality: Under RERA, these pre-agreement forms cannot override the statutory law. Section 13 acts as a shield. Even if you signed a form agreeing to 20% forfeiture, the builder cannot legally enforce it because they accepted more than 10% without a registered agreement, rendering their own action illegal.
Earnest Money vs. Part Payment
Money paid before the final sale deed usually falls into two categories: Earnest Money or Part Payment. The distinction matters if the deal fails.
Earnest Money: This is a guarantee. It shows you are serious. If you (the buyer) default, the seller can forfeit this amount. Courts generally accept 10% as a reasonable forfeiture amount.
Part Payment: This is simply an installment of the price. If the deal fails, this must be refunded. It cannot be forfeited.
Supreme Court Precedents on Forfeiture
The right of a seller to keep your advance money is not absolute. The Supreme Court of India has clarified the legal position in landmark judgments regarding when forfeiture is permissible.
The Core Ruling: The Court distinguished between “Earnest Money” and “Advance Price.”
- If the contract interprets the amount as Earnest Money, it signifies a guarantee for performance. It can be forfeited if the transaction falls through due to the buyer’s fault.
- If the amount is mere Part Payment of the purchase price, it cannot be forfeited unless there is a specific clause in the agreement authorizing such forfeiture.
Takeaway: Always check if your receipt specifically labels the amount as “Earnest Money.”
The Core Ruling: Even if a contract allows forfeiture, the seller cannot forfeit an amount that is unreasonable (like 50% of the price). The forfeiture must be a genuine pre-estimate of damages or reasonable compensation (typically capped at 10% in standard practice).
Refunds and Interest: The SBI MCLR Rule
If a developer fails to deliver or you withdraw for a valid reason (like a title defect), RERA mandates the return of your advance with interest. You are not just entitled to the principal amount.
The Formula: The rate of interest payable by the promoter to the allottee is the State Bank of India’s Marginal Cost of Funds Based Lending Rate (MCLR) plus 2%.
Dispute Resolution Hierarchy
If your advance is stuck, knowing where to file a complaint is half the battle. The legal system for real estate offers a tiered structure for grievance redressal.
Concurrent Remedies: Consumer Court vs. RERA
In the landmark judgment Imperia Structures Ltd vs. Anil Patni (2020), the Supreme Court ruled that RERA does not bar the jurisdiction of Consumer Forums. Buyers can choose to approach the National Company Law Tribunal (NCLT) or Consumer Courts if the “service” provided by the builder is deficient.
| Feature | RERA Authority | Consumer Court |
|---|---|---|
| Primary Focus | Structural defects, Delay, Title | Deficiency in Service, Unfair Trade Practice |
| Compensation | Interest (MCLR + 2%) | Interest + Mental Agony + Litigation Cost |
| Time to Resolve | Generally Faster (6-12 months) | Slower (Years due to hierarchy) |
The Paper Trail: Receipts and MoUs
A simple receipt is risky. It often lacks the details needed to enforce a sale in court. An “Agreement to Sale” is safer but requires stamp duty. In states like West Bengal, paying this duty is a strategic move.
West Bengal Stamp Duty Data
The cost of legalizing your advance agreement is often lower than the risk of losing your money. Below is the duty for an Agreement to Sale without possession.
| Property Value | Stamp Duty | Registration Fee |
|---|---|---|
| Up to ₹30 Lakh | ₹5,000 | ₹7 |
| ₹30L – ₹60L | ₹7,000 | ₹7 |
| ₹60L – ₹1 Crore | ₹10,000 | ₹7 |
| Above ₹3 Crore | ₹75,000 | ₹7 |
Legal Templates
Use the toggles below to switch between a simple token receipt and a more formal Memorandum of Understanding.
