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Cash Payment in Property Deal – Beware of Black Money

Property Deal
Property Deal

Builder is asking for a Cash Payment in a Property Deal. One of the clients told me recently. I suggested against cash payment; he said that he will never be able to close a property deal. From this interaction, you can gauge the menace of black money in Indian Economy. Sometimes knowingly or unknowingly a buyer generate black money through cash payment. Another primary concern of my blog readers in small towns/semi-urban/rural areas is a lack of trust factor between buyer and the seller. In large no of cases, the cheque bounce after the property deal is completed. In this scenario, it becomes tough for a seller to recover the money from the buyer.

For the knowledge of readers of this blog, in small towns and semi-urban areas, the “possession of property” also known as “Kabza” in Hindi is proof of ownership. In most of these towns, the property records are not computerized. I was just highlighting the case when unknowingly the buyer is generating black money. Whatever the case may be i don’t support, recommend or suggest any cash payment in a property deal. It is illegal and risky for the buyer.

One of my clients asked me so it means i cannot pay a single rupee in cash :). His concern was token money. I said you could pay up to Rs 20,000 in cash as Cash in Advance or a Token Money. In case deal is cancelled then you cannot receive it back in CASH. This provision is kept to take care of operational difficulty in paying the advance or “Bayana” as it is popularly called in Hindi.

Another major confusion among buyers is between a cash payment and quoting of PAN in a property deal. To clarify, it is mandatory to quote PAN for sale/purchase of immovable property exceeding Rs 10 lakh. It should not be confused with cash payment. In layman terms, max cash payment allowed is only Rs 20,000. The sellers mislead the buyers by quoting that cash payment of 10 lakh is permitted in a property deal. It is not true.

How builder/seller lure buyers for Cash Payment in a Property Deal?

1. Save Stamp Duty and Registration Charges: As i mentioned in my previous posts that stamp duty and registration charges are a substantial amount. I shared in my post that you can save stamp duty and registration charges in a legitimate way. The biggest trump card of a builder or seller is that buyer need not pay stamp duty on cash payment. In many cases, the buyer is not comfortable with a cash payment, but a carrot of savings in stamp duty is tempting enough for a buyer.

As a buyer, you can always save stamp duty through legal and rightful manner. Any cash payment means high risk, and i will share the risks later in the post. Also, it is against the law, and you are an equal partner in crime i.e. circulation of black money.

2. Discount: Another common way to lure the buyers for cash payment in a property deal. Normally builder/seller offer a discount of 5%-10% on cash payment. Generally, Black money is a chain reaction. Builder receives because they also need to pay to suppliers/bribe. It’s cancer and should be stopped at the point of origin. If all the buyers of a property decide that they will not encourage this practice, then it will help to clean the system. It requires a collective effort.

3. Capital Gain Tax: In the case of resale property, a seller demand cash payment to avoid capital gain tax. A property is registered at circle rate/guidance value. The balance amount is received in cash from the buyer. It is a very high-risk transaction for a buyer. The seller tells the buyer that buyer can also save capital gain tax at the time of future sale. It is not true. In fact with strict laws on black money, a buyer has to accept 100% payment through cheque in future when he will decide to sell. It will increase his capital gain liability manifold. In layman terms, the capital gain tax saved by the current seller will be paid by the buyer when he will sell the property.

To explain with an example, assuming current seller bought property at 20 Lac and selling at 40 lac. For simplicity purpose, he is incurring short-term capital gain of 20 lac. Now he insists buyer pay 10 lac in cash and buyer oblige. In this case, current seller’s short capital gain in property deal will reduce to 10 lac from 20 lac i.e. savings of 10 lac in capital gain. The cost of acquisition for the current buyer will be 30 lac.

Let say current buyer decide to sell after two years for 50 lac. In this case, short-term capital for a buyer will be 20 lac i.e. 50 lac minus 30 lac. Now if he would have paid full money through cheque, then his cost of acquisition would have been 40 lac. The capital gain will be 10 lac, but now it is 20 lac i.e. 10 lac more. Therefore, as i mentioned that capital gain saved by the current seller will be paid by the current buyer in future.

Cash Payment in Property Deal – High Risk for a Buyer

Last year in Delhi and NCR alone, 1200+ fraud cases were filed by buyers who were trapped in cash payment in a property deal. The modus operandi of property deal is that a temporary or “Kachha” agreement as it is called in Hindi is signed between the seller and the buyer. This agreement contains FULL Value of a property deal. For example, if buyer and seller agreed to property deal of 50 lac. Out of 50 lac, it is agreed that 15 lac will be a cash payment, and 35 lac will be through cheque.

On the day of property registration or before that buyer will pay 15 lac in cash to the seller. Now the sale deed will be registered at 35 Lac, and this kachha agreement will be destroyed once the property deal is completed. In this entire transaction, there is NO MENTION of 15 lac cash payment.

Now you must be wondering where are the chances of fraud. In this case, after the property deal, seller produced the copy of kachha agreement in front of police and told that buyer is not paying balance 15 lac. Stumped…In some cases, seller blackmailed buyer and negotiated for an additional sum. Typically a seller tells the buyer that kachha agreement is legally invalid, but it is not true. Only the name is Kachcha or temporary agreement, but legally it is Pakka Agreement :). In this case, the buyer cannot claim that he has paid 15 lac in cash. Therefore, you can be trapped in this entire property deal.

Moreover, if God forbids something goes wrong after the payment of cash say the deal is cancelled, or something happens to the seller. In one of the case, the complainant paid cash on the day of registration. On the way to sub registrar office, the seller died in an accident. It is highly unlikely scenario but a possibility. Now the total cash component is gone for the buyer. If property deal is cancelled, then it is impossible to recover the cash component from the seller.

Penalty for Cash Payment in Property Deal

The biggest misconception of any buyer or seller is that how the income tax department will come to know about the cash payment. Please remove this misunderstanding from your end. Once this misconception is cleared, let’s discuss the penalty on Cash Payment that can be levied by income tax department. A Penalty of 100% can be levied on Cash Payment. A penalty will be applicable on Seller. An action can be taken against buyer also. Therefore, in the example mentioned above, if the seller receives 15 lac as a cash payment, a penalty of equivalent amount i.e. 15 lac can be imposed on Seller.

As a buyer, you have to decide whether you would like to take a risk in property deal as i highlighted. Also, note that all the cash transactions are being monitored. Any unusual cash transactions from a bank account will immediately put you under the scrutiny of income tax department. I am not creating fear but requesting all the readers not to encourage illegal practices. Be a good citizen of India and make all payments through legal channel. Any cash transaction of more than 20,000 should be done responsibly and carefully. Also, remember that by doing this you will be helping govt of India in curbing BLACK MONEY.

Copyright © Nitin Bhatia. All Rights Reserved.

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Rippin Gandhi
Rippin Gandhi
8 years ago

Dear sir , I agree with ur above post but would also like to add one important aspect of black money which is becoming an issue for our economy.

Though builders and agents prefer black money so that they can pay their dues in cash to sub contactors and evade applicable taxes and reinvest in other projects , etc.

But there is a sizable number of service class in India which invest in flats and land for better returns in future. This class of today’s buyers are future’s seller. My Question is how are they going to deal with counterfeit notes circulating in market wh
en they sell property and acept cash money?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Rippin Gandhi

I cannot comment as the cash transaction is illegal. If you are accepting cash through legal channel then best solution is to accept the same in bank and deposit in bank account. The bank executive will check counterfeit notes.

Riyaz Shaikh
Riyaz Shaikh
8 years ago
Reply to  Nitin Bhatia

But Sir, I have done trasaction before June 2015, so Penalty would be applicable on me if I do SD and reg today?? Beacuse SD and RG is not done, I recvd 50% in cash and 50% in chq and combined figure would be stated in agreement which would be registered now, deal was done in Nov 2014, So can I register now

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Riyaz Shaikh

It is subjective and depend on the AO. You can register property.

raj
raj
8 years ago

Dear Sir,

I have read your below article:

Now you must be wondering where are the chances of fraud. In this case, after the property deal, seller produced the copy of kachha agreement in front of police and told that buyer is not paying balance 15 lac. Stumped…In some cases, seller blackmailed buyer and negotiated for an additional sum. Typically a seller tells the buyer that kachha agreement is legally invalid, but it is not true. Only the name is Kachcha or temporary agreement, but legally it is Pakka Agreement :). In this case, the buyer cannot claim that he has paid 15 lac in cash. Therefore, you can be trapped in this entire property deal.

My question is, if the seller/builder done this kachcha or temporary agreement for some plot with buyer, now due to delay in finance process the seller/builder sell the same plot to the other buyer without informing the buyer with whom he has done kachcha or temporary agreement. In this condition what action can a buyer take against him for breaking kachcha or temporary agreement?

Your prompt reply in the matter is highly appreciated.

Thanks

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  raj

As i mentioned in my post that there is NO Kachha Agreement. An agreement is an agreement and both parties are legally bound to honor the terms and conditions of the agreement. You can file a legal case against the seller for breach of agreement clauses.

MS
MS
8 years ago

Dear Sir, very informative blog. However, it is not clear from your article what penalty can be imposed on the buyer for making cash payments. My query is strictly from a legal or tax perspective, is the buyer committing a wrong by making cash payment (not accounted for in the stamp duty)?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  MS

Please check last section of the post. A Penalty of 100% can be levied on Cash Payment.

vikas
vikas
7 years ago

Hello Sir,
I have taken flat in society and paid cash amount on name of parking and mseb. all amount paid in cash. now we are getting dispute from few members in society regarding open parking as they have not paid any money saying open parking is not chargeable.

can we file compliant against builder for getting those money back though we dont have any direct proof of giving money to him

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  vikas

Nothing much can be done in this case. Cash transaction is illegal and you will land yourself in trouble.

Meghan Sardar
Meghan Sardar
7 years ago

Hello Sir, I booked a flat with the token of 10 lacs and builder was asking for some percent in cash i told him no, he said he will try to make all white transaction by some means process back and forth took some time itself. Since i am a freelancer it took some time to get the loan approved. when loan was approved they turn their back and said you have to pay some amount in black. and now they are saying if i don’t make it early they will forfeit my token amount, can they do that? or can i get all my money back if i don’t want to go forward with them?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Meghan Sardar

Builder may forfeit token amount. You should check the terms and conditions mentioned in the booking form signed by you or allotment letter issued by the builder.

Roop Kumar
Roop Kumar
7 years ago

Hello sir, Your information is very valuable for taxpayers as well as public in large. I have one query.
During FY 2014-2015 One piece of land was sold out for Rs.560000/- . I didn’t mentioned any PAN in Bainama papers because land was in the name of my wife and she do not have any PAN too. Could you tell me ..was it mandatory to give PAN of wife in this case or not?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Roop Kumar

Yes it was mandatory. Currently income tax department is sending more than 7L notices wherein PAN was not quoted in high value transactions.

Deepak P
Deepak P
7 years ago

Hello Sir,
I have to sell my village household . As per gov. rate the land has a value of 6L only , but as per current market rate it is valued at 35L . I am okay to pay capital gains arising from the deal. But the buyer is insisting to write the sale deed at govt. rates !!
I am wondering how I can make it a 100% legal transaction?
Can I receive cheque for amount exceeding the sale deed amount and show the same in my tax preparation ?
Regards,
Deepak

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Deepak P

It is not how will account or show the balance amount i.e. 29L.

Imran Vartak
Imran Vartak
7 years ago

i want to sale 1bhk 650 area for 1.5cr in wadala east mumbai if intrested parties call on 9930887873

Imran
Imran
7 years ago

Hi sir,
It was a nice article and it spread a lot of knowledge to me.

I am in some scenario which I explained below,
I wanted to buy a land and we all know that usually sellers prefer cash payments, I decided to convey the seller that I am going to do transaction in either account payee check/imps/rtgs/neft/DD.

Please let me know whether I am going correct?

Is this correct time to go for this buy where higher denomination notes are banned?

Will there be any impact in future if I transfer money from account to account in this buy?
I. e. Assume if land valuation is 5lac and seller demand 8lac.. whether I will be doing legal if I transfer seller 8L amount from account to account?

Thanking you with appreciation on your article.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Imran

Any non-cash payment is okay like cheque/DD/Banker’s cheque/NEFT/RTGS/IMPS.

The impact of demonetisation will vary from area to area.

If you transfer entire 8L through cheque/DD/Banker’s cheque/NEFT/RTGS/IMPS then it is perfectly legal.

Imran
Imran
7 years ago
Reply to  Nitin Bhatia

Hi Nitin sir,

In continuation to my above query, I got some more queries due to benami property act introduced in November. It will be really helpful to get some suggestions from you on my queries listed below. Thank you in advance.

1) How to identify that a property is a benami? If the property is registered in the name of builders son or spouse then can it be directly considered as benami property?

2) What if buyer has bought the property legally including cashless transaction and later property turn out to be benami then will this impact buyer?

Thank you
Imran

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Imran
Imran
Imran
7 years ago
Reply to  Nitin Bhatia

Hi Nitin,

I did go through your article on benami property. It was nice and really helpful. But I have one question,

Whom can I consult to make sure the property which I am planning to buy is legal as well as not coming under benami act.?
(BTW, I spoke to one lawyer and he said it will be difficult to say any property as benami as this will involve source of income).

Your suggestion will help a lot.

Thank you
Imran

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Imran

I agree with your lawyer. You can check in-person with the previous 2-3 owners reg ownership but i am not sure how will you locate them. It is difficult to find whether property is benami or not.

anitha
anitha
7 years ago

hi, in a particular case a immovable property (site) was sold for full value in cash. Agreement also done for full value and reqisteration done @ full value – only thing is entire transaction was in cash. This was as the party was ignorant of the amendement done in jun15 where the said penalty was included for cash transactions on immovable property (excess of 20k) – the income is also being included in current AY (long term capital gains).. In this case will the penalty still be applicable or this can be explained and genuineness proved and the AO can in this case waive the penalty? please advice.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  anitha

The answer is subjective and it depends on the assessment of AO.

Mantha
Mantha
7 years ago

Sir , Selling person haven’t registered plot on his name till now and he claims this plot belongs to him and he has already purchased plot from previous owner according to him and I already made half payment .On notary paper I and the selling guy sign with two witness about half payment have been done in cash.He is making excuse when I ask the person who have name on paper to meet.He is saying at time “registry” the person(who have name on paper) will come.If I take original documents of plot from him before making whole payment. Can this help me for filing case against him if he refuse for agreement or the person who have name on paper deny? Or what other steps can I take ?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Mantha

The approach of seller is non-transparent. Secondly, the title of the property is not in his name. Though it is your personal decision but i will not enter into such transaction as the probability of fraud is high.

Ashok Kapur
Ashok Kapur
7 years ago

please throw some light concerning on max limits cash payments on immovable property transactions(agreement for sale) in FY 2003-04. Was it necessary to state the PAN Nos of Buyer and Seller as per Sec 114 B and 114 C on an agreement to sale during that period?

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Ashok Kapur

Max limit of cash payment is Rs 20,000. PAN is mandatory if property value is more than Rs 10 Lac.

Raj
Raj
7 years ago

Hi Sir,
Thanks for taking time to provide such valuable information.
We are planning to purchase home that costs around 50L. But the builder says the land and building value combined as 30L. He insists that we register for 30L and pay 20L using cash.But if we pay remaing 20L through any cheque/loan/online transfer we need to pay an extra amount ie., the amount he has to pay to government through tax on the remaining 20L. I didnt find this to be legal.Please suggest.
Thanks in advance

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Raj

You are right. Cash payment of more than Rs 20,000 is illegal. Please check following post
https://www.nitinbhatia.in/real-estate/property-deal-cash-payment-black-money/

Danish
Danish
7 years ago

Hi Sir,
It was an interesting post from you. I am a NRI and have a query regarding sell of my flat.I had purchased a flat in 2010 in 29Lakhs and now selling this year in 37Lakhs. so if I apply Cost of Inflation index (CII) which is 1125/711=1.58 on my purchase price , then my capital gain is coming in negative. Then what will be my tax implications and do I need to mention this in any form or so and I don’t have any other income in india.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Danish

You need to file ITR and declare capital loss to claim TDS refund.

Nitin Patel
Nitin Patel
7 years ago

Hi sir,
It is very helpful post from you.. I Have purchase a plot near ahmedabad in six year (72 month) installment scheme of rs.5000/month before 3 years. I had paid (5000*36 inst) 180000/ rs in cash till now…Company has provided reciept for the same. But now company is accepting payment only by cheque or any other banking instrument… And asked me to take cash back and return old reciepts provided by them. And give that payment by cheque..
But i have problem that I have shown that reciepts in my income tax return..
What should I do now?..
company is saying that they cant show more than 20000 cash in registration..

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Nitin Patel

You have not mentioned whether you signed any agreement with the company or not. You have to be careful in this case and need some document from company’s end for revised payment arrangement.

Devender Rao
Devender Rao
7 years ago

Hi Sir,
I sold a shop in Rs.102000/- to someone. He paid me a cheque of that amount, but the cheque was dishonoured. I have mentioned all transaction in my books. May I receive this amount in cash now? Because he is willing to give me the whole amount in cash.

Regards
Devender Rao

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Devender Rao

No. Cash transaction of more than Rs 20,000 is illegal. Cheque bounce is a criminal offence. You can issue a legal notice to buyer to pay the amount through cheque within 15 days.

ank raj
ank raj
7 years ago

Sir,
I have sold a plot on 31 st march 2017..registry was done for 24 lakh..but buyer made 14 lakh cash payment and rest through cheque…will there be a problem in future…

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  ank raj

Any cash transaction of more than Rs 20,000 is illegal.

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