Real Estate Deal Cancellation – Nuances One Must Know

At times a fairly good looking deal may turn sour. It is therefore pertinent to know, what all are involved In a real estate deal?

An agreement is signed and a token amount is paid. (Please note that cash payments for Real Estate is illegal). All payments have to be made in cheque / Neft etc.

What aspects should the deal encompass? The important parts of the deal are included in an Agreement to Sell (ATS).

This should clearly state the parties to the deal ie, the buyer & seller with their Address, Aadhar & Pan details.

Clear definition of the Property under consideration.

Details of the property’s acquisition, ie bought from etc, as also the Conveyance Deed/ Builder Buyer agreement and if it is on resale, all details of previous owners and recording of the same.

Govt approvals for buildings, building plan approval etc.

It gives out unambiguously, the Sale Consideration, ie the Price the Buyer has to pay to Seller. This is broken up in the Payment plan between the Buyer & the Seller, giving out the timeline.

In case of not meeting the payment obligations or on refusal of the Seller to get the property registered in the Buyer’s name, the legal aspect needs to be included. A normal deal cancellation entails forfeiture of the Advance amount paid, which is generally 10% of the total cost. Similar amount is applicable to both sides.

The ATS should include that there is no mortgage or encumberance on the property being sold. Legal jurisdiction in terms of property generally is based on the location of the property, ie the Court which has jurisdiction in that area.

How should one refund the money when a property deal is cancelled?

Technically, all deals are to be in Bank Transactions, so there must be communication in writing and / or mail, wrt the cancellation of the deal and Okayed by both parties. The refund money transfers must be to the same account from the payments were done. This avoids future litigations.

Financial and income tax consequences for a property deal which is called off or cancelled.

As per the income tax laws, if a property deal is cancelled, treatment of the token or other payment money has no benefit. It is taxed as an income for the individual having gains. If the buyer backs out from the deal, the seller has the right to forfeit the token money. The forfeited token or advance payment money, does not give the buyer any income tax benefit. It 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.

Stamp duty paid -refund

Normally, for property transactions, the buyer pays stamp duty. It is generally a fixed amount or a percentage of the property’s market value. One also pays registration charges, for registration of the agreement. These rates are prerogative of the state govt and hence the rules for refund of stamp duty paid for property transactions, varies from state to state. In some states you are entitled to claim refund of the stamp duty, within a stipulated time frame, if the same has not been executed. The government generally deducts some percentage of the stamp duty.

GST Refund

While buying under-construction property, the Builder levies a GST on the agreement value, depending on the category the property falls, viz ‘affordable housing’ etc. In case of cancellation, of the under-construction property, the builder may agree to refund the booking amount and installments paid. However, even though the Builder may have charged you GST, he may not refund this amount, as he has to deposit the amount with the government. The builder is not entitled to claim any refund with respect to the GST, as he has already rendered services to you.

In case of resale to another buyer, by you, the sale price already includes GST.  However, GST is included while calculating Capital Gains, as it has been capitalized and 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.

Real Estate investments are always in large monies. It is therefore, always better to consult an expert and take legal and financial advise for the same. Be safe, buy safely.