Token Money: Meaning, Tips and More for A Property Purchase

The Indian real estate market has made it a standard practice that the seller of a property for sale can appropriate the entire token money if the buyer backtracks from his verbal promise as there are no written rules.

What Is Token Money?

Token money is the advance payment that a buyer pays to the seller, after reaching and coming into a mutual verbal agreement to buy property. To elaborate, when a home purchase takes place and the deal gets finalised between the buyer and the seller, a formal process is initiated to conclude it legally.

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To seal the deal, the buyer pays a small portion of the total transaction value to show his genuine intentions. This payment is commonly known as the ‘token amount’ or the booking amount in Indian real estate jargon.

In most of the northern region, this payment is known as bayana and it refers to the advance payment that the buyer has already made, to buy the apartment.

This payment is a standard practice that is done for every commercial and residential property, irrespective of the type of property or deal value.

What Are The Other Common Names?

The token amount is also referred to as the ‘advance deposit’ or ‘earnest deposit’. Other terms used are ‘binder’ or ‘good faith deposit’.

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How Much Do I Have To Pay As Token Money?

There are no rules with regard to token money payment in real estate transactions. It is just the certain percentage of the deal amount that the buyer pays to the seller, in good faith.

When is token money paid?

After the property visit and for finalising the deal to conclude the verbal agreement, the buyer provides the token amount so as to secure the deal.

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At this point of time, the paperwork is yet to start. There will be no written statement and in case of buyer’s cancellation for the booking of the flat for sale, the seller can forfeit the amount.  On the other hand, the seller will have to return the token money to the buyer, if he cannot complete the transaction, because of any reason.

How Much Money Has To Be Paid As Token Amount?

In the real estate industry, there are no fixed rules regarding the amount that the buyer has to pay to seal the property deal to the seller. It differs from case to case, person to person and place to place.  

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In case, the home for sale is directly purchased through the developer then, the buyer pays a certain percentage of the down payment as the token amount that gets adjusted. 

To understand better, if a buyer plans to pay Rs 10 lakhs from his own pocket for the purchase of a property that is worth Rs 50 lakhs, he would typically give the developer just Rs 1 lakh as the token or booking amount.

Do not get confused with the terms down payment and token money, as they never can be used interchangeably. The down payment is the amount you pay upfront to buy a property. The token amount is just a part of it.

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Is the token money refundable?

When any deal in real estate takes place, the buyer generally pays some amount as token money. There are other terms and conditions for the transfer of the property and when they are agreed upon then only the token amount is given. The amount of token money may vary, from being merely a token to a substantial percentage of the value of the property.

1. If the buyer fails to complete the transaction, the seller would forfeit the token money, unless the parties have made a notarized agreement stating otherwise. However, a notarized document would come in handy, as proof that the token money has been paid to the seller and also lay the ground rules for the purchase.
2. If the seller takes a step back and refuses his commitment to selling 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 for the purchased property.

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Is Token Money Taxable?

For 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 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 booking 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.

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Does It Have Any Legal Validity?

Though this is the first step still, this document does not have legal validity, because it has not been registered. It only acts as proof of payment that is given by the buyer to the seller.

The buyer and the seller enter into a registered contract, only when the buyer pays at least 10% of the total property value and a builder-buyer agreement or an agreement for sale is signed between the two parties.

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As there are hardly any chances to get back the refund of the token money in case the property purchase fails. It is important to make sure that the buyer must keep the token amount as low as possible. The buyer should commit to a seller, only after making all monetary arrangements to complete the transaction.

Like, in case if the home loan is not yet approved, it could be risky to pay the token money. Avoid paying token money in cash and checking the credibility of the seller to ensure a sound and safe investment in real estate.

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