Property deals need not always culminate in the execution and registration of an agreement. Sometimes, the deal may not go through and 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.
Treatment of token money under the income tax laws, if a property deal is cancelled
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.
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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 GST. 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.
(The author is a tax and investment expert, with 35 years’ experience)