Property deal need not always culminate in the execution and registration of an agreement. Sometimes, the deal may not go through and 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.
Treatment of token money under the income tax laws, if a property deal is cancelled
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.
