Remediation of Token Money under Income Tax laws if property deal is cancelled
In the case of deals for
the purchase of any real estate, the buyer usually pays some amount in the form
of token money, when other terms and conditions are agreed for the transfer of
the property. The amount of token money can vary from a substantial percentage
of the value of the asset to being just a token. If the seller withdraws from
his commitment to sell his property, there are no immediate financial
implications, except that the buyer has the right to sue for specific
performance in courts of law. However, it is not usually recourse.
If the buyer exits the
deal, the seller has the right to forfeit the token money paid. In relation to
such alleged token money, the buyer cannot claim any income tax benefit, as it
is treated as a capital loss under the tax laws. However, the advance money
that is seized becomes the seller's income in the year in which the deal is
closed. Such confiscated funds are taxed on income from other sources and not
under the 'main capital gains', even if the income is received in respect of a
capital asset. Prior to the amendment of the law in 2014, the amount of the
acquisition of the property must be deducted from the cost of the acquisition
of the property in relation to which it was obtained, the year in which the
property, which is the subject of the deal, was sold.
Stamp duty refund
Generally, for all
property transactions, the buyer has to pay some amount as stamp duty. It is
either a fixed amount or a percentage of the market value of the property. You
will also have to pay a registration fee to register the agreement. The stamp
duty and registration fee payable are determined by the respective state
governments. Therefore, the rules for refund of stamp duty to be paid for
property transactions will vary from state to state. You must pay the stamp fee
before the execution of the document.
In Maharashtra, you are
entitled, under certain circumstances, to claim a refund of the stamp duty
within six months from your payment. You can claim a refund of stamp duty paid
on such an instrument if it has not been executed. The government deducts 1% of
the stamp duty, a minimum of Rs 200 and a maximum of Rs 1,000 of the stamp duty
paid.
In case of cancellation
of a transaction for the purchase of property and for which the agreement has
already been registered, the Government of Maharashtra permits a longer period
of two years from the date of agreement to claim the return of stamp duty. This
refund is allowed only if the developer fails to hand over possession of the
booked property and this fact is mentioned in the cancellation deed as a reason
for the cancellation of the deal. The rules also provide that the cancellation
agreement must be registered.
The buyer of the property
can get a 98% refund of the stamp duty, if the stamp duty refund is applied.
With the refund application, you are required to attach the original agreement,
as well as the original cancellation deed, with both documents registered.
However, you will not get a refund of the registration fee.
GST (Goods andServices Tax) refund
When you book an
under-construction property as per the existing laws, the developer charges GST
on the value of the agreement at a fixed rate. The rate will depend on whether
the property falls in the 'affordable housing' category and also whether the
developer is taking advantage of GST. For any reason, if you
wish to cancel the booking and thus, surrender your rights to the property
under construction, the builder may agree to refund the paid booking amount and
installments, or even that you may agree to pay a higher amount. The although
the developer may charge GST from you, he may or may not agree to refund this
amount, as he would have already deposited the amount in the credit of the
government. The builder will not be entitled to claim any refund in respect of
GST, as he has already provided services to you.
When calculating capital
gains, the GST you have already paid will be part of the cost of acquisition.
Capital gains will be taxable as long-term, if your holding period is three
years, or else, profit, if any, will be taxed as short-term capital gains.
