Must Knows

How to deal with advance payments during property purchase

[] We look at some of the various advance payments that buyers may have to make during a property purchase and ways to safeguard their interests, vis-à-vis such payments

A buyer has to bear a lot of miscellaneous costs while purchasing a property, including the cost incurred towards legally transferring the asset under his name. Buyers may sometimes find themselves in a position where they are asked for advance payments of various kinds by the seller / builder. So, what are the various advance payments that the seller could demand and what should the buyer do under such circumstances?

You are reading: How to deal with advance payments during property purchase

High token money / earnest deposit / booking amount

Sellers may sometimes refuse to discuss the terms and conditions of the transaction, unless they are certain of the genuine intentions of the buyer. In order to gauge the seriousness of the buyer, they often demand that the buyer prove that he has the financial wherewithal to make the purchase. So, they would ask for a goodwill deposit, token money, booking amount, earnest deposit, bayana, etc., before they are willing to discuss the deal.

Irrespective of the term used to describe this advance payment, the impact on the buyer is the same. They have to pay a certain percentage of the transaction value as the proof of their intention. Typically, builders allow buyers to book homes by accepting as less as Rs 1 lakh as the token money. Sellers will also demand at least that much money, in any real estate market, to initiate the dialogue.

Read also : Encumbrance certificate: All you wanted to know

Note here that not making this payment is not much of an option for the buyer. They will have to first make this payment and then pay at least 10% of the transaction value, while signing the agreement for sale. As long as the payment is restricted to this, the buyer is not putting himself in any kind of financial risk. Even if you have the money to make the payment upfront, the buyer should avoid paying any more money than this, till the sale deed is registered.

Dos and don’ts for paying token money for a property purchase

[] Dos and don’ts for paying token money for a property purchase

Stamp paper purchase

Under the provisions of the law, buyers have to pay the stamp duty on the property purchase. However, one should not rush to do this. If you were to withdraw from the deal or if the seller decides to back out, all the money invested in the purchase of stamp papers would go waste, as these documents are non-transferable and non-refundable.

Advance TDS payment

Read also : What is a Quasi Contract?

The law also makes it mandatory for the buyer to deduct 1% tax at source (TDS) on property purchase, from the transaction amount and deposit it with the government. So, if a property is being purchased for Rs 50 lakhs, the buyer will pay the seller only Rs 49.50 lakhs. The remaining Rs 50,000 will be deducted as TDS and deposited with the tax authorities. In case of NRI sellers, the TDS charged is much higher, since the buyer actually deducts the capital gains tax on the transactions.

Either way, since it is a complicated process, buyers often take the help of banks, especially if they are using housing finance for the purchase, to deduct the TDS. A typical tendency among financial institutions is to deduct the TDS before the transaction has actually taken place. Even if the amount is not very high, your money would be stuck for a long time if the deal falls apart.

Money for home loan pre-closure of the seller

If the seller still has a running home loan on the property, they would ask the buyer to make advance payments, which could be used to close the loan and complete the sale with the help of the documents required. In such cases, the lender will have to provide a no-objection certificate (NOC), stating that the loan has been repaid and there are no pending dues against it. It is advisable for buyers to avoid making such payments.

Advance payment of brokerage

Buyers have to pay between 1% and 2% of the property value as a brokerage charge. Unless the broker has provided you all the services that they promised, as part of the post-sales assistance, avoid making the full payment.


What is token money?

In property deals, the token money is paid when the buyer and seller reach a verbal agreement to conclude the deal.

How much money has to be paid as a token amount?

There are no fixed rules about token money payment.

Can I buy a property on which the seller still has a running loan?

The property can be sold only after the existing owner has repaid the loan.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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