Laws related to security deposit in India

With the increasing employment and educational opportunities, there is a significant demand for rented properties in key cities. The rental rates are on the rise owing to this high demand coupled with factors like upcoming infrastructure projects. The rental rates vary across cities and different localities within the same cities, driven by several factors. Besides the hefty rent, tenants incur various hidden costs when renting a property. The security deposit costs also add up to the initial upfront expenses for these tenants. Typically, landlords demand a security deposit, or a rental deposit, equivalent to two months’ rent. This could differ based on the specific laws in different states. One should note that there are laws governing security deposits in India that prevent landlords from unduly charging security deposit money to their tenants. In this guide, we discuss these laws related to security deposits in India.

What is a security deposit?

In leasing, a security deposit refers to a specified amount tenants must pay their landlords over and above the first month’s rent. Security deposit, an upfront cost tenants incur before moving into the property, is held by landlords throughout the tenure of the rental agreement. It is refunded to the tenant at the end of the tenure. Landlords may refund the security deposit with deductions due to any damages to the property caused by the tenant or other reasons.

Why do landlords charge security deposit?

Landlords charge the security deposit money as a security against any unforeseen situation or expenses arising during the tenancy. That is, if the tenant causes damage to the property, fails to pay the rent or violates the terms and conditions of the rental agreement, in such cases the landlord can consider this amount as compensation or deduct some amount in the cause of damages and refund the remaining money to the tenant.

When should the security deposit be paid?

Typically, the tenant must pay the security deposit in advance before moving into the rented property. The payment should be done at the time of signing the rental agreement. Similarly, landlords should refund the security deposit to the tenant within a specified period like one or two months, usually after inspecting the property once the tenant has vacated the property. Upon the expiry and non-renewal of the rental agreement, the security deposit will be 100% refundable.

Difference between security deposits and advance rent payments

Security deposit and advance rent payment are two different costs tenants incur, although they sound similar. Sometimes, landlords may ask for money in advance, such as rent from the tenant, to cover the final period of the lease or for renewal. This advance rent is usually not refundable and is adjusted at the end of the rental term.

Example:

Mr Kumar rents a property for a monthly rent of Rs 15,000. The landlord charges security deposit equal to one months’ rent and one months’ advance payment on top of the monthly rent. Let us break down the total cost that Mr Kumar will incur.

Laws related to security deposit in India

#1. Limit on maximum security deposit amount

According to the Model Tenancy Law, the security deposit to be paid by the tenant in advance must not exceed two months’ rent in residential properties and six months’ rent in non-residential properties. In several cities, especially top metros like Delhi and Mumbai, landlords have been taking advantage of the high cost of living and demanding higher amounts exceeding two months’ rent.

#2. Mandatory requirement of signing rent agreement

As per the law, it is mandatory for the landlord and tenant to sign a rent agreement that specifies the terms and conditions of the tenancy and clauses agreed upon by both parties. The agreement should specify details of the monthly rent and security deposit amount to be paid. Moreover, the contract, which should be legally registered, should state when the amount will be refunded. The landlord must also provide a receipt for the security deposit payment to the tenant.

#3. When can costs be deducted from a security deposit?

Landlords have the right to deduct money to repair any damages to the property caused by the tenant. It is possible the tenants may have caused minor damages like drilling holes in the walls, broken bathroom faucets or cracked tiles or windows in the living room. Such expenses can be deducted from the security deposit amount and the remaining money must be refunded to the tenant. In some cases where there are major damages, the landlord can withhold the entire amount or some portion of the amount. However, one should note that the costs related to the gradual structural changes or natural wear and tear of the property, such as paint peeling off the walls, electrical rewiring, cleaning the drainage or worn-out doors and hinges, cannot be deducted from the security deposit. Such expenses must be borne by the landlord on their own.

#4. Clause for refund of security deposit

Prospective tenants and landlords should ensure there are clauses related to security deposit mentioned in the rental agreements. It should state the security deposit amount, refund conditions and explanation of when the security deposit might not be refunded.

Here is a sample format

Rights of a tenant if the landlord fails to refund security deposit

Tenants can take legal action against landlords if they do not return the security deposit. They can take the following steps:

• If the landlord is not paying the security deposit or make deductions from the amount, the tenant can follow up and negotiate with the landlord.
• Send a legal notice to the landlord asking them to return of the security deposit.
• If the landlord does not respond to the notice, the tenant can file a case in civil court for the recovery of the security deposit.
• The tenant must gather all the required documents, including the rental agreement, security deposit receipt, etc.
• One should note that court cases may stretch up to years but sometimes get cleared within months. Make sure to have all the documents in place to avoid further hassles. One can seek the help of a lawyer.

Security deposit trends in top cities in India

The Model Tenancy Act (MTA) 2021 was introduced to address the common issues faced by tenants and landlords in India. It lays down several laws related to security deposit, as discussed above.

• So far, four states, namely Tamil Nadu, Andhra Pradesh, Uttar Pradesh and Assam, have revised their tenancy laws based on the regulations under the Model Tenancy Act.
• There are state laws governing security deposits in other cities, such as the Delhi Rent Control Act.
• In cities like Delhi and Kolkata, landlords typically ask for a security deposit equivalent to 2 or 3 months’ rent, which is in line with the laws stated in Model Tenancy Law.
• In Mumbai and Bangalore, a security deposit demanded by landlords is on the higher side, given the high cost of living.
• Similarly, in cities such as Hyderabad and Chennai, landlords demand a security deposit equivalent to three to six months’ rent, depending on the locality and other factors.

Housing.com News Viewpoint

Prospective tenants looking for a rented property in any city should consider the security deposit costs when calculating their budget. Rental rates significantly vary from city to city and locality to locality. Thus, it is better to conduct proper research on the prevailing rental rates when finding a property.

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