When a property contract is cancelled, how is the money refunded?

If a property deal is called off or canceled, what are the financial and income tax implications that follow?

Property agreements do not necessarily need to culminate in a transaction being executed and registered. Often, after the delivery of token money or even after any of the payments have been made, the contract can be dropped halfway. The contract can, for whatever reason, be canceled by either the seller or the buyer.

When a property contract is cancelled, how is the money refunded?

Now, there is no excuse for customers to lose heart since the vendor would be accountable for refunding the money they may have taken from you as the ‘token money,’ as well as being accountable for the offer. Also, in the original agreement to sell, the terms and conditions for the refund process must be set out, so that if a contract is to fall apart, no uncertainty exists about the issue of refund.

How does token money get taxed?

In the event of transactions for the purchase of some real estate, until the other terms and conditions for the transfer of the property are settled upon, the buyer normally pays any amount as nominal money. The amount of token money can vary, from a single token to a large percentage of the property’s worth.

There are no real financial repercussions if the seller backs off his promise to sell his land so that the buyer gets the right to file a claim in the courts over specific results. This is not necessarily resorted to, however.

The vendor has the right to forfeit the token cash paid if the customer pulls out of the contract. The buyer does not assert any income tax gain with respect to such forfeited token money, since this is considered under the tax laws as a capital loss.

The advance money/earnest cash that is forfeited, however, remains the seller’s profits in the year in which the contract is terminated. Such forfeited earnest money is charged under the head of ‘interest from other sources’ and not under the head of ‘capital gains’ even though the income is earned with respect to a capital asset.

The amount of forfeited earnest money was supposed to be excluded from the expense of purchasing the asset with which it was purchased in the year in which the asset, which is the topic of the transaction, was sold, prior to the reform of the legislation in 2014.


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Reimbursement for the stamp duty paid

Generally, the consumer needs to pay a certain fee as stamp duty on all real estate purchases. It is either a set sum or a percentage of the market value of the land. To apply with the agreement, you will have to pay application fees. The stamp duty rates & registration fees payable are decided by the governments of the respective states.

Thus, the laws for repayment of stamp duty charged for sales of land will vary from state to state. Before the execution of the paper, you are expected to pay stamp duty.

In Maharashtra, you are entitled, in some cases, to demand a refund of the stamp duty within six months of its payment. If the same has not been done, you may demand a refund of the stamp duty charged on that instrument. 1% of the stamp duty is deducted by the state, up to a minimum of Rs 200 and a limit of Rs 1,000 of the stamp duty paid.

In the event of the cancellation of the contract for the purchase of a property for which the arrangements have already been signed, the Government of Maharashtra shall, subject to certain provisions, provide for a longer period of two years from the date of the agreement to demand the refund of the stamp duty.

This refund is permissible only if the developer declines to hand over custody of the booked property and this fact is stated in the termination deed as the reason for the cancellation of the contract. The regulations also provide that it is appropriate to register the cancellation agreement.

If a claim is made for a refund of the stamp duty, the buyer of the property will get a refund of 98 percent of the stamp duty. You are allowed to connect the initial arrangement for the refund request, as well as the original cancellation deed, all with the papers being registered. You cannot, though, get a refund of the payments for registration.

When a property contract is cancelled, how is the money refunded?

GST Refund (Goods & Services Tax)

The developer levies a GST on the arrangement value, at a certain amount, when you book an under-construction house, as per the current laws. This rate would depend on whether or not the property comes into the ‘affordable housing’ category and also on whether the input credit is used by the developer.

For whatever cause, if you wish to revoke the reservation and thereby forfeit your rights over the property under construction, the contractor could offer to refund the cost of the reservation and payments charged, or even agree to pay you a higher amount, depending on the complexities of demand and supply at the moment.

While the developer may have received GST from you, since he may have already deposited the money on the government’s credit, he may or may not consent to repay this sum. As it has already made its services to you, the builder would not be able to receive any refund with regard to the GST.

If you enter into an arrangement to sell your rights to a third party in the under-construction house, with the developer as the verifying party, the selling price will be GST inclusive and you would not be entitled to reclaim or owe any GST on such a deal separately.

The GST that is already charged by you will form part of the purchase expense when measuring the capital gains. If the retention duration has been three years, the capital gains will be taxable as long-term, or otherwise, the earnings, if any, will be taxed as short-term capital gains.

Caution Word

As it is probable that the property transaction will not shift in the direction you expected it to, to safeguard their rights, buyers must bear in mind those points. The first step in that direction is to stop paying cash for some money. If money is paid in cash, the vendor might later refuse to refund the money, if there is no legal evidence that you made the purchase.

Also, during the process, any attempt should be taken to eliminate any conflict. Although there are many legal options open to consumers to obtain redress, the procedure of claiming the relief is often long-drawn and monetarily costly. Sit across the table and resolve the matter with the other side, in the best interest. Surely, they, too, do not want to be taken to the trial, which will cause them to waste time and resources.


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Disclaimer: The views of this expressed above are for informational purposes only based on the industry reports & related news stories. Navimumbaihouses.com does not guarantee the accuracy of this article, completeness, or reliability of the information & shall not be held responsible for any action taken based on the published information.
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