Property deals need not always culminate in the execution and registration of an agreement.

Sometimes, the deal may be abandoned halfway, after the payment of token money or even
after some of the payments have been made. The deal may be cancelled by either the seller
or the buyer, for any reason. The seller may change his  mind midway about the transaction,
because he finds a better offer. The buyer may have to let go his plans to move ahead with
the purchase, because of unforeseen circumstances that impact his earning capacity. In
some other cases, the buyer may not be able to secure a loan to go ahead with the
purchase. In other words, there may be a wide variety of reasons for which a deal may fall
through.

This can trigger in number of questions in the mind of buyers, who have paid a
certain percentage of the property value as advances:

 Will the seller refund my money?

 If so, will he refund all the money or would he make some deductions?
 What should I do if, the seller refuses to refund the advance money?
 Am I legally obliged to let go of the token amount?

We try to answer all of these questions in this article.

Even if a deal falls through, this is no reason for buyers to lose heart, since the seller
will be responsible to refund the money they might have taken from you as the ‘token
money’, as along as he is responsible for the deal falling through. Also, the terms
and conditions about the refund process must be laid in the initial agreement to sell,
so that no confusion remains on the subject of refund, if a deal were to fall through.
See also: Dos and don’ts for paying token money for a property purchase
 

How is token money taxed?

In case of deals for the purchase of any real estate, the buyer generally pays some
amount as token money, when the other terms and conditions for the transfer of the
property are agreed upon. The amount of token money may vary, from being merely
a token to a substantial percentage of the value of the property. If the seller backs off
from his commitment to sell 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. However, this is generally not resorted to.
If the buyer backs out from the deal, the seller has the right to forfeit the token
money paid. With respect to 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/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. Before the amendment of the law in 2014, the
amount of forfeited earnest 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