Advance Payment in a property deal is very common. Just to clarify that here i am not referring to advance payment or token money to initiate a property deal. It is must pay a token money or advance else there is no financial commitment from buyer’s end to close the property deal. The quantum of token money, i discussed in my post on the same topic and may vary from case to case basis. In the idealistic scenario, after the payment of token money, the buyer should make balance payment only at the time of property registration. Unfortunately, we don’t live in the idealistic world. Besides the token money, sometimes the seller / bank do demand additional advance payment in a property deal under various heads.
It is quite surprising that in a couple of instances, banks insist on advance payment in a property deal. Such instances are against the existing rules and regulations. In short, intentionally or unintentionally banks are putting buyer’s money at risk. In other instances, buyers are trapped by over smart broker or seller. In very few cases, the intent of a seller is to commit financial fraud. I am only sharing very common scenarios.
Some of the buyers counter question me “what is wrong with advance payment in a property deal? Anyways as a buyer i have to pay this amount to the seller at a later stage”. I agree that at the end of the day you have to pay 100% consideration value but timing is equally important. Front loading of payment means increased risk for a buyer. Therefore, it is important to clarify the details of advance payment in a property deal with the seller and home loan provider before signing on the dotted line.
5 Types of Advance Payment In A Property Deal A Buyer Should Avoid
TDS or Tax deducted at source is no. 1 in the list wherein banks insist on advance payment in a property deal. If you are availing home loan then bank / home loan provider will insist you deposit the TDS in advance. The amount is huge in case of TDS on NRI under section 195. In almost 99% cases, the bank insists that buyer should make the advance TDS payment and submit the payment receipt before disbursement from bank’s end. It is quite ridiculous. The rule says that TDS is due only at the time of making payment. How can you force a buyer to deposit TDS in advance?
In one of the instance, my client was availing home loan from MNC bank and bank manager was insisting on advance TDS payment from buyer’s contribution. The problem was out of Rs 100, the buyer paid Rs 10 as a token money and Rs 80 was supposed to be disbursed by the bank. The TDS amount was Rs 20.66 (Long Term Capital Gain for property worth more than 1 Cr). The bank was insisting buyer pay this amount from own pocket. The bank manager was not able to explain even if the buyer pays Rs 20.66 towards the Advance TDS, the total payment to a seller will be Rs 80 + Rs 20.66 + Rs 10 i.e. Rs 110.66. How will the buyer will get refund of excess amount paid i.e. Rs 10.66.
The above-mentioned example was an operational side effect of advance payment in a property deal. Now million dollar question is if god forbids and after making advance TDS payment the deal does not go through. In this case, how the buyer will recover Rs 20.66? No one is willing to answer the same. In a practical instance, one of the blog readers lost Rs 15L in a similar scenario. He made advance TDS payment and the seller died in a road accident while traveling from Delhi to Chandigarh to execute the sale deed. Though it is highly unlikely but any unforeseen event cannot be ruled out.
In short, TDS as an advance payment in a property deal is a BIG NO even if it is 1% (in the case of resident Indian seller). You can ask the bank, what should be the date of payment in this case on form 26QB or challan 281? and who will be responsible if the deal does not go through? In some cases, the sub-registrar insist on advance TDS payment for property registration.
To summarize, TDS compliance is buyer’s responsibility as per income tax act. You can submit written application with bank informing the residency status of the seller as NRI/resident Indian. The bank should deduct applicable TDS from each disbursement and transfer this amount to buyer’s account. The buyer can deposit the TDS on or before the last date and submit TDS certificate with the bank and the seller.
2. Pre-closure of Home Loan of a Seller:
In some cases, seller act street smart and tell a buyer A to make an advance payment in a property deal for his home loan pre-closure. The probability of fraud is high in this case. The seller will close his/her home from the funds of buyer A. The seller will get original documents from the bank. After that seller will sell the property to some other party say buyer B. Now legally the same property is sold to buyer A and buyer B. The seller will get almost 1.5 to 1.8 times the sale value and buyer A & buyer B will fight with each other for the property.
I have addressed this issue in my post, 5 Steps to Close Home Loan of a Seller. It is always advisable to follow the standard process to avoid any future shocks. A buyer should directly pay to the home loan provider of the seller to pre-close the home loan.
3. Stamp Duty and Registration Charges:
The rules related to stamp duty and registration charges vary from state to state. In some states, you can buy stamp papers equivalent to the stamp duty charges before property registry. Now the catch is that these stamp papers are non-transferable and non-refundable. There is a validity expiry of typically 6 months from the date of purchase. Few states provide an option to pay stamp duty and registration charges in advance.
In one of the cases, the over enthusiastic buyer bought stamp papers in advance. Unfortunately, the deal was called off because of some legal defect in the title of the property. He lost the money as he could not finalize any other property within 3 months. In this case, the validity expiry of stamp papers was 3 months from the date of purchase.
Therefore, it is always advisable that buyer should avoid advance payment in a property deal to purchase stamp papers or make a payment towards the same. You can always carry a banker’s cheque or demand draft on the day of property registration. To be on safer side, check the exact amount of stamp duty and registration charges from sub-registrar office. You should check these details at least 5-6 days in advance from the date of registration, get banker’s cheque or demand draft issued from your bank and deposit on the day of registration with the sub-registrar office.
4. Higher Self Contribution:
The basic thumb rule is that as a buyer you should make not pay more than 20% of property value to the seller before property registration. The reason being higher the amount paid, higher is the risk for a buyer. In my post, 5 points a property buyer should not tell a seller i shared that you should not share % of funds you are going to pool from own sources. In a recent query from one of my client, he was planning to pool 70% funds from own pocket and was availing balance 30% as a home loan. He disclosed the same to the seller. The seller started demanding 70% towards advance payment in a property deal and balance 30% at the time of registration. I suggested my client tell the seller that he could not arrange the additional funds and now he is availing 80% home loan.
Therefore, in case you are planning to pool higher contribution from your end still, you should avail 80% home loan else seller will demand higher advance payment. In this case, your risk will be limited to 20% of consideration value before property registration. Avail 80% disbursement from the bank and prepay home loan to the extent of avail funds within few months. My client availed 80% home loan and is planning to prepay 50% of property value to home loan provider next month.
5. Date of Registration:
Normally, the property deal is closed within 45 to 60 days. In very few cases, the buyer and seller agree to close the deal in 6 /12 /18 months. In a couple of cases, date of registration was 2 or 3 years away from the date of the sale agreement. Trust me the risk of a buyer increases when the agreed upon date of registration is after 12 months. There can be multiple reasons for the delay in property registration. Buyer need time to arrange funds, the property is on an irrevocable lease, the seller need a longer period to make stay arrangement etc. In such scenarios, a very minimal amount should be paid towards advance payment in a property deal.
In other words, the advance payment in a property deal also depends on the time lag between the date of the sale agreement and sale deed. Based on my experience i can say that when time lag exceeds 6 months, the probability of closure of property deal is just 1 out of 5. The seller may back out if he gets better price or property price increase. The buyer may back out if he thinks he will get a better deal or property price decrease.
Words of Wisdom:
The quantum of advance payment in a property deal decides the risk for a buyer. The cash payment in property deal is BIG NO. In the case of cash payment, you are risking your entire money. Moreover, cash transaction of more than Rs 20,000 in a property deal is ILLEGAL. Always remember that title of the property is transferred only at the time of registration. In fact, off late i received certain queries from buyers who would like to make 100% payment on the date of registration. The reason being, some of their friends, family members etc had a bad experience because of higher advance payment in a property deal.
Last but not the least, a buyer should include relevant and applicable clauses in sale agreement to safeguard the financial interest in the case of any unfortunate event or the deal is called off due to any unforeseen circumstances.
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