May 24, 2024

A 101 Guide On Making Advance Payments

While Buying A Property

Advance payments are one of the most crucial things you will come across as a homebuyer when you strike a deal for any real estate property. It safeguards your interests and gives the developer an assurance that the house has been booked. Notably, the property comes with various supplementary costs, transferring the asset to your name. Hence, a developer will take an advance fee from you in different forms.

If you plan to purchase a home, do not be surprised if you are asked to make advance payments in different forms. Here are five advance payments sellers could demand that you need to know!

Advance Payments For Buying A Home

Let’s say you liked a property in Mumbai. You checked the property’s transaction history in Mumbai, explored the locality price trends, checked the estimated market price and finalized a property after making yourself informed with every important property insights.

After finalising the property, the developer will ask you to pay an advance fee to book the property. Here are the five advance payments the seller may demand from you:

  • Token Money
  • Stamp Duty
  • TDS Payment in advance
  • Money for seller’s pre-closure of home loan
  • Advance brokerage payment

 

  • Token Money 

Sellers may not always disclose and discuss the terms and conditions of a transaction unless they are sure of your intentions of purchasing the property. They often gauge the seriousness of buyers by their willingness to pay a certain amount for buying the property. They may ask for any of the following before they close the property purchase deal:

  • Token money
  • Goodwill deposit
  • Earnest deposit
  • Booking amount
  • Bayana
  • Binder
  • Advance deposit
  • Good faith deposit

No matter which term you use to describe this advance payment, its impact on you will remain the same. The builders let buyers book homes by accepting token money of less than INR 1 lakh. Sellers will also demand this amount to initiate the dialogue. This amount is adjusted to the total money you will be paying eventually.

You do not have a choice but to pay the seller as a buyer. You will first pay this amount and later at least 10% of this transaction value while signing the agreement of sale. As long as the payment is restricted, it will not put you at any financial risk. Avoid paying any more money than this till the sale deed is registered, even if you can pay upfront. In case, you do not complete the transaction, the seller will forfeit the token money unless you and the seller have a notarised agreement specifying otherwise.

This advance payment can be used for paying:

  • Down payment
  • Closing costs
  • Prepaid expenses
  • Stamp Duty

You have to pay the stamp duty on any property you purchase under the provisions of the law. It is paid to get legal ownership of the property you are buying. It may not seem like an advance payment, but it is an additional payment you need to bear.

There are three cases that can make the purchase of stamp duty paper worthless. These situations are:

  • You back out
  • Seller backs out
  • You and the seller call off the transaction

In either case, the money invested in the purchase of stamp papers will go to waste as they are non-refundable and non-transferable. Also, the stamp duty on house purchases differs for every house. So make sure you either check the actual price online or at the sub-registrar’s office to know its exact amount. 

  • TDS Payment In Advance

It is mandatory for you to deduct 1% TDS on property purchase from the transaction amount and deposit it to the government as per the law.

Hence, if you purchase a property worth INR 50 lakhs, you will only pay INR 49.5 lakhs to the seller. The remaining INR 50,000 will be deducted as TDS and deposited to the tax authorities.

So, when you complete Form 26QB, you need to submit the following:

  • 1% TDS with the government
  • Your PAN card
  • The seller’s PAN card

It prevents the seller from avoiding capital gains taxes. If the seller is an NRI, the TDS charged will be much higher. In either case, it is a complicated process, and you may need help from the banks if you use housing finance for the purchase, to deduct the TDS. Any financial institution deducts the TDS before the transaction has taken place. Hence, even if the amount is not high, your money will be stuck for a long time if the deal falls apart.

You are responsible as a buyer for TDS compliance under the Income Tax Act. You can file a formal application with the bank stating that the vendor is non-residential Indian. The TDS is deducted from each payout by the bank and sent to your account. You can deposit the TDS as per the deadline and present the TDS certificate you get to the bank and the seller.

  • Money For Seller’s Pre-Closure of Home Loan

If your seller has a running home loan on the property, the seller may ask you to make an advance payment to:

  • Close the loan
  • Complete the sale with the help of the documents provided

Note that you can only buy the property with a running loan when the property’s current owner repays the entire loan in full before selling it. In cases like this, the lender will issue a NOC (No Objection Certificate) stating that the loan is repaid and there are no dues pending against it. Apart from the home loan down payment, you may have to pay additional charges.

However, making these payments can be dangerous sometimes. Hence, it is advisable for you to avoid making such payments. It may appear straightforward, but the truth is, it is not!

  • Advance Brokerage Payment

If you opt for a real estate agent to help you buy a property, you have to pay the agent. You cannot deny it. You have to pay 1-2% of the property’s value as brokerage charges. Avoid making full payment unless the broker provides you with all the services they promised as part of the post-sales assistance.

The Bottom Line

It is crucial for you to know about all the advance payments you need to make to arrange your finances accordingly. If you have a fair idea of advance payments you need to make before you own the property, you can save the money or arrange it before buying the property. Evaluate the property’s market value before buying it using online tools. After all, it is wiser to avoid putting yourself under any financial burdens, right?

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