By Commercial property acquisition in India operates on strict financial yields and statutory compliance, distinct from residential markets. The initial ‘Advance’ or ‘Token’ phase often represents the highest unhedged risk for capital deployment, as funds frequently move before binding agreements exist.
This report examines the legal thresholds for initial payments, specifically addressing RERA Section 13 mandates, the 2018 Specific Relief Act amendments, and fiscal risks like blocked GST Input Tax Credit.
Use the integrated financial calculator and automated legal receipt generator to structure your transaction terms before releasing the first cheque.
Strategic Acquisition of Commercial Real Estate in India: The Advance Payment Protocol
Commercial real estate transactions in India operate on a fundamentally different financial frequency than residential deals. While residential purchases often involve emotional decisions, commercial acquisitions rely strictly on yield calculations and rigid statutory compliance. For institutional investors or corporate entities, the initial phase—specifically the deployment of the “Initial Advance” or “Token Money”—constitutes the period of highest unhedged risk.
This report analyzes the pre-purchase phase of commercial property acquisition. It addresses the quantum of advance payments, the legal characterization of funds, and the logic required to determine safe exposure levels. We integrate a forensic review of standard market documentation to highlight common pitfalls.
The Hierarchy of ‘Yes’: LOI vs. MOU vs. ATS
Before any money moves, the transaction structure is defined by the document signed. “Blocking” a commercial unit requires understanding which document binds the seller legally.
| Document | Binding Nature | Advance Payment Norm |
|---|---|---|
| Letter of Intent (LOI) / EOI | Non-Binding (Usually). Expression of interest only. | Zero to Nominal (Fully Refundable). |
| Term Sheet | Semi-Binding. Defines commercial terms (Price, Payment Schedule). | Token Amount (1% – 2%). |
| Agreement to Sell (ATS) | Binding & Statutorily Recognized. | 10% (Booking Amount). |
RERA Section 13 Mandate
For Under-Construction Properties, Section 13 of the RERA Act, 2016 prohibits a promoter from accepting more than 10% of the cost of the property as an advance or application fee without first entering into a registered Agreement for Sale. Paying >10% without a registered agreement is a statutory violation.
Safe Advance Calculator
Determine your maximum risk-adjusted advance payment based on project parameters.
Pre-Cheque Verification Protocol
Do not release the initial cheque until these six points are verified. This checklist acts as your first line of defense.
Forensic Analysis of Standard Agreements
A review of typical secondary market “Sale Deeds” often reveals critical vulnerabilities. A document titled “Sale Deed” is often technically an Agreement to Sell. A Sale Deed is the final conveyance document registered with authorities. An Agreement to Sell merely outlines terms for future transfer.
Red Flags in Standard Documentation
- Cash Components: Payments made in cash often violate Section 269SS of the Income Tax Act. Section 269ST prohibits receiving ₹2 Lakhs or more in cash. Even smaller amounts create weak legal trails.
- Ambiguous Terminology: Using “Earnest/Advance” interchangeably is fatal. Earnest money is forfeitable. Advance payment is refundable. Ambiguity aids the defaulting party.
- Missing Statutory Clauses: Agreements often lack references to TDS (Section 194-IA) or GST liability.
Visualizing Payment Risk
The following chart illustrates the risk exposure relative to the transaction timeline. The “Danger Zone” represents capital deployed before a registered agreement exists.
The Taxonomy of Initial Payments
Money changes hands in three distinct stages. Understanding these distinctions prevents capital erosion.
| Stage | Standard Amount | Purpose | Risk Profile |
|---|---|---|---|
| 1. The Token | 1% to 5% | Signal bona fide interest; remove property from market. | High |
| 2. Booking Amount | 10% (RERA Max) | Formalize contract; trigger Agreement to Sell. | Moderate |
| 3. Part Payment | 20% to 90% | Fund construction or facilitate exit. | Secured (if Registered) |
Earnest Money vs. Part Payment
The Supreme Court of India distinguishes between these two concepts. Earnest Money is a guarantee for performance and can be forfeited if the buyer defaults. Part Payment is simply a portion of the price and must generally be refunded. Your agreement must explicitly categorize the funds to avoid litigation.
SC Precedent: Forfeiture Limits
In Kailash Nath Associates vs. DDA, the Supreme Court ruled that forfeiture of earnest money must be reasonable. Even if the contract allows forfeiture, the seller cannot profit from the buyer’s default if no actual loss occurred. Generally, courts view forfeiture exceeding 10% of the total consideration as a “penalty” rather than reasonable compensation, making it potentially voidable.
Drafting Protocols: Essential Templates
Copy these clauses into your Agreement to Sell (ATS) to protect your capital.
1. The “Safe Refund” Clause (Buyer Protection)
2. The Statutory Compliance Clause (TDS/GST)
Automated Legal Drafter: Token Money Receipt
Generate a standardized “Receipt-cum-MOU” for the initial advance. This is NOT a substitute for a registered Agreement to Sell but offers interim protection for the Token Amount.
1. Enter Details
Fiscal Compliance Radar
Commercial transactions face intense scrutiny. Non-compliance triggers penalties that destroy profitability.
Resident TDS (Section 194-IA)
Applicable if property value > ₹50 Lakhs. Rate is 1% of the higher of Sale Price or Stamp Duty Value. Use Form 26QB.
Cash Ban (Section 269SS)
Accepting an advance of ₹20,000 or more in cash attracts a 100% penalty. Section 269ST bans cash receipts of ₹2 Lakhs or more in a single day.
The NRI Seller Protocol (High Risk)
Buying commercial property from a Non-Resident Indian (NRI) drastically changes the TDS liability.
- Section 195 Applies: You cannot use Form 26QB. You must obtain a TAN (Tax Deduction Account Number).
- Higher Rates: TDS is NOT 1%. It is typically 20% (Long Term Capital Gains) + Surcharge + Cess. The effective deduction can exceed 23%.
- Liability: If you deduct only 1% for an NRI seller, the Income Tax Department will recover the balance (20%+) from you (the buyer), plus interest and penalties.
The GST Trap: Blocked Input Tax Credit (ITC)
Many commercial buyers incorrectly assume they can offset the GST paid on the property purchase (usually 12% or 5%) against their business GST output liability.
- Section 17(5)(c) & (d) of CGST Act: Explicitly BLOCKS ITC on works contract services and goods/services used for construction of immovable property (other than plant and machinery) on one’s own account.
- Impact: The GST paid on the purchase becomes a sunk cost. It must be capitalized as part of the asset value, not claimed as credit. This increases the effective acquisition cost by 5-12%.
- Exception: ITC is available ONLY if you are in the business of renting immovable property and the construction is for the purpose of renting (subject to specific judicial interpretations like the Safari Retreats case, though this is still litigated).
The Valuation Trap: Section 50C & 56(2)(x)
In distressed sales, the Actual Transaction Value may be lower than the government-notified Circle Rate (Stamp Duty Value). This triggers double taxation.
Safe Harbor: If the difference is less than 10%, these sections usually do not apply.
Zoning Compliance: The ‘CLU’ Check
A common pitfall in Tier-2/Tier-3 cities is buying commercial units built on residential or agricultural land without a formal Change of Land Use (CLU) certificate.
- Risk: Properties without CLU face sealing by municipal authorities or demolition orders.
- Verification: Demand the CLU payment receipt and the Final Approval Letter from the Town & Country Planning Department before paying the Booking Amount.
- Conversion Charges: Ensure all external development charges (EDC) and conversion fees are fully paid by the seller.
The ‘Assured Return’ Trap & BUDS Act
Many builders attract investors by offering a fixed monthly return (e.g., 12% p.a.) on the advance payment until possession.
- Unregulated Deposit: Under the Banning of Unregulated Deposit Schemes (BUDS) Act, 2019, such schemes often qualify as unregulated deposits if not strictly structured.
- Unsecured Creditor: If the builder defaults, courts may classify you as a “financial creditor” or “depositor” rather than a homebuyer, altering your priority in liquidation.
- Recommendation: Avoid ‘Assured Return’ schemes. Instead, negotiate a lower base price per square foot. Capital appreciation is tax-efficient; assured returns are taxable and high-risk.
Financial Routing: The RERA 70% Rule
For under-construction commercial projects, verifying where your advance goes is as important as how much you pay.
The Law (RERA)
The promoter is legally mandated to deposit 70% of the amounts realized from allottees (including your advance/booking amount) into a separate schedule bank account (Escrow).
The Buyer’s Check
When paying via RTGS/NEFT, ensure the beneficiary account is the designated RERA Collection Account of the project, not the builder’s general corporate account.
The GPA Trap: Suraj Lamp Case
In the landmark judgment Suraj Lamp & Industries Pvt. Ltd. vs. State of Haryana, the Supreme Court declared that property transactions via General Power of Attorney (GPA) + Will + Agreement to Sell are invalid for transferring title.
Never pay an advance for a property where the seller holds only GPA rights. Insist on a registered Conveyance/Sale Deed.
Remedy for Breach: Specific Performance
A common fear for buyers is: “What if property prices rise after I pay the advance, and the seller cancels the deal to sell at a higher price?”
The 2018 Amendment to The Specific Relief Act, 1963:
Prior to 2018, courts had discretion to award damages (money back + interest) instead of enforcing the sale. The 2018 Amendment (Section 10) made “Specific Performance” a Mandatory Rule.
Impact: If you have a valid, registered Agreement to Sell and are willing to pay the balance, the Court MUST order the seller to transfer the property to you. They cannot simply refund your money and walk away.
Pre-Leased Asset Protocol
Acquiring a property with an existing tenant (Pre-Leased/Rent-Yielding) requires a specialized advance payment structure to prevent loss of revenue during the transition.
| Component | Adjustment Mechanism |
|---|---|
| Security Deposit | The Tenant’s Deposit held by the Seller must be transferred to the Buyer. Typically, this is deducted from the Final Sale Consideration payable by the Buyer. |
| Rent Apportionment | Rent is pro-rated based on the registration date. If the deal closes on the 15th, the Seller keeps 15 days of rent; the Buyer gets the rest. |
| Attornment Letter | A mandatory tripartite document signed by Seller, Buyer, and Tenant, formally acknowledging the change of ownership and directing future rent to the Buyer. |
The Pre-Leased Trap: Lock-in Period Analysis
You buy a property for its 6% yield. The tenant leaves in 3 months. Your yield drops to 0%. This is the “Lock-in Trap”.
- Due Diligence: Review the Lease Deed carefully. Does the tenant have a “Lock-in Period” remaining?
- The Exit Clause: If the tenant can exit with just 3 months’ notice, the high valuation based on “long-term yield” is fake.
- Valuation Check: If the lock-in is expiring soon, value the property based on the Vacant Asset Value, not the Rent Capitalization Value.
NOI Reality Check: Hidden Yield Killers
When calculating yield on advance payments, distinguish between Gross Rent and Net Operating Income (NOI). The following deductions often reduce actual returns by 10-15%:
Entity Selection Matrix
The legal entity used to purchase the asset fundamentally alters tax liability and succession planning.
Individual
- Tax: Slabs (up to 30%+).
- Rental Income: Taxed as ‘Income from House Property’ (Standard deduction 30% available).
- Succession: via Will.
LLP (Limited Liability Partnership)
- Tax: Flat 30% (+ Surcharge).
- Dividend: Profits distributed to partners are tax-free in hands of partners.
- Compliance: Moderate (MCA filings).
Private Limited Co.
- Tax: 25% (for turnover < ₹400Cr).
- Dividend: Taxable in hands of shareholders.
- Compliance: High. Best for holding multiple assets.
Dispute Resolution: The Commercial Courts Act, 2015
For commercial property disputes valuing over ₹3 Lakhs, the Commercial Courts Act, 2015 provides a fast-track mechanism.
Strategic Advice: Ensure your Agreement to Sell includes a clause mandating Pre-Institution Mediation as required under Section 12A of the Act. This often forces a settlement regarding the advance payment refund without entering prolonged litigation.
Drafting Protocols: Advanced Indemnity (The “Clean Slate” Clause)
Protect yourself from the previous owner’s unpaid dues (Electricity, Water, Property Tax) by adding this specific indemnity clause.
Frequently Asked Questions
While Section 269ST sets a ₹2 Lakh limit, Section 269SS prohibits accepting any advance for immovable property of ₹20,000 or more in cash. Always use banking channels to create a legal money trail.
A “Bayana” is a colloquial term for earnest money. A Bayana receipt is often informal. An Agreement to Sell is a formal contract. Relying on a Bayana receipt is risky; always execute a registered Agreement to Sell for enforceability.
Generally, no. GST applies to under-construction properties or first sales by a developer. Resale of completed properties with an Occupancy Certificate usually attracts Stamp Duty but not GST.
If you have a written agreement stating the money is refundable (or if the seller defaulted), you can file a suit for recovery. Without a written agreement, proving the terms becomes difficult. This is why the “Token” should be minimal (1%).
Yes, for high-value commercial transactions (₹5 Cr+), using a third-party Escrow Agent is standard. The advance money sits in Escrow and is released to the seller only upon successful verification of title documents and NOCs.
