Token Money Refund When a Property Deal Falls Through
A buyer hands over Rs 5 lakh as token money on a resale flat, gets a WhatsApp message saying "received", and then discovers a bank charge on the property that nobody mentioned. The seller stops taking calls. There is no agreement, no receipt worth the name, and no clause about what happens next.
That is the standard shape of a token money dispute in a private resale, and it is avoidable. Forfeiture is not automatic and "earnest money" is not a magic phrase. Here is where the law sits.
Key takeaways
- Token money is typically 1% to 2% of the price, or a flat Rs 50,000 to Rs 2 lakh. Earnest money under a proper agreement to sell is usually 10% to 20%.
- A seller cannot forfeit a sum simply because the receipt says "non-refundable". Section 74 of the Contract Act caps recovery at reasonable compensation, and the Supreme Court has treated excessive forfeiture as a penalty.
- If the title is defective, the buyer is entitled to the money back, and under Section 55(6)(b) of the Transfer of Property Act holds a charge on the property for the amount prepaid.
- A loan rejection is not automatically the seller's problem. Without a written finance clause, the buyer usually loses the deposit.
- Limitation is three years for a suit to recover money, so a dispute left to drift becomes unrecoverable.
Token money, earnest money and advance
These get used interchangeably and they are not the same thing.
| Payment | Typical size | Stage | Forfeitable? |
|---|---|---|---|
| Token money | Rs 50,000 to Rs 2 lakh, or 1% to 2% | Handshake, before any agreement | Contested — often refundable in practice |
| Earnest money | 10% to 20% of price | On signing the agreement to sell | Yes, if genuinely earnest and the buyer defaults |
| Part payment / advance | Any amount | Against the price, during the term | No — must be returned on cancellation |
| Balance consideration | Remainder | At registration | Not applicable |
The distinction courts care about sits in the last two rows. Earnest money guarantees performance and a defaulting buyer can lose it. Money paid as part of the price is an advance, and even a defaulting buyer gets it back, less the seller's proved damages. Sellers who take Rs 20 lakh, call it all earnest money and forfeit the lot tend to lose that argument.
Section 74 and the penalty problem
Section 74 of the Indian Contract Act 1872 says that where a sum is named in a contract as payable on breach, the injured party is entitled to reasonable compensation not exceeding that sum, whether or not actual loss is proved. The word doing the work is "reasonable".
Three decisions set the frame, and they do not sit together as neatly as most articles suggest. A five-judge bench in Fateh Chand v Balkishan Das (1963) held that any stipulation naming a sum payable on breach falls within Section 74, so forfeiture beyond a genuine earnest deposit is a penalty. Maula Bux v Union of India (1970) is usually cited for the proposition that reasonable forfeiture of earnest money sits outside Section 74 altogether. In Kailash Nath Associates v DDA (2015) the Supreme Court said that observation was not necessary to decide Maula Bux, and held that every earnest money clause triggered by breach is subject to Section 74 — forfeiture needs a breach and, ordinarily, some loss flowing from it.
Sellers still argue Maula Bux and buyers still argue Kailash Nath, so treat a forfeiture clause as arguable, not settled. The direction of travel is clear enough: the larger the sum forfeited relative to the price, the more likely a court cuts it down.
In practice: a seller who forfeits 1% to 2% and can point to weeks the flat sat off the market is on solid ground. A seller who forfeits 25% and re-sells a week later at a higher price is not.
What the receipt must say
Most token money moves on a one-line acknowledgement. That is the mistake. A receipt should run to half a page and record:
- Who is paying whom, with PAN and address of both, and confirmation that the receiver is the recorded owner.
- The property, by full description — plot or flat number, tower, khasra or survey number, and the previous sale deed's registration particulars.
- The total agreed consideration, and that this sum is adjustable against it.
- The date by which the agreement to sell will be executed, usually 15 to 30 days.
- What happens if the seller's title is not clear: full refund within a stated number of days, with interest.
- What happens if the buyer withdraws: the specific sum forfeitable, and no more.
- Mode of payment. Bank transfer or cheque. A cash token above Rs 20,000 also runs into Section 269SS of the Income-tax Act, which penalises cash receipts of Rs 20,000 or more in connection with immovable property transfers.
That last point catches people out. The penalty under Section 271D equals the amount received, and it falls on the seller.
When a title defect turns up after you have paid
The seller's duty to make out a marketable title is statutory, not a courtesy. Section 55(1)(a) of the Transfer of Property Act 1882 obliges the seller to disclose material defects in the property or title of which the buyer is unaware. Section 55(6)(b) gives a buyer who has properly declined the sale a charge on the property for the price prepaid, plus interest.
A mortgage never released, a missing link deed, a pending partition suit, lakhs of unpaid society dues, a mutation entry that does not name the seller — each puts the buyer in the right, and the refund is not a favour.
The way to avoid the fight is to spend two weeks before paying anything. Pull the encumbrance certificate, trace the mother deed and chain of title, and run the standard title and legal check before buying. A Rs 15,000 legal opinion before the token is cheaper than a Rs 5 lakh recovery suit after it.
Cancellation of a builder booking is a different animal
Everything above concerns a private resale between two individuals. If you booked in an under-construction project and the developer cancelled, or you are exiting because possession slipped, the remedy runs through RERA and the refund rules are far more favourable to the buyer. That is covered separately in our guide to possession delay and RERA refund rights.
When the buyer's loan is refused
This is the commonest reason a resale falls over, and the default legal position surprises buyers. Arranging finance is the buyer's obligation. If the agreement says nothing about it, a loan rejection is simply the buyer's failure to perform, and the earnest money goes.
Rejections cluster around things a buyer can see coming: a panel valuer's markdown, an extra floor beyond the sanctioned plan, a chain of title the legal vetting will not clear, an original deed sitting with another bank, or the buyer's own credit. Our list of why home loans get rejected is worth reading before you commit, not after.
A finance clause that actually works
Vague clauses fail. "Subject to loan approval" is an invitation to litigate. A workable clause names four things: the amount, the deadline, the proof, and the consequence. Something in this shape:
"This agreement is conditional on the Purchaser obtaining a sanction letter for a housing loan of not less than Rs 60,00,000 from a scheduled commercial bank on or before [date, 45 days from execution]. If the Purchaser, having applied to at least two lenders within 10 days of execution and having furnished all documents sought, does not obtain such sanction by that date and delivers copies of the written rejections to the Seller within 5 days thereafter, this agreement stands cancelled and the Seller shall refund the entire earnest money within 15 days, without interest and without deduction. Failure to apply within 10 days shall render this clause inoperative."
That protects both sides. The buyer gets an exit for a genuine rejection; the seller is not held hostage by a buyer who never applied, and gets a fixed date rather than an open one.
If the money is already stuck
- Send a written demand by email and registered post, setting out the payment, the reason for cancellation and a 15-day deadline. This creates the record everything else rests on.
- Assemble the trail: bank statement, receipt, messages, the broker's emails. WhatsApp exchanges are admissible and often decide these cases.
- Choose the remedy. A suit for recovery of money if you want the cash back; a suit for specific performance if you still want the property and the seller has backed out. Specific performance must be filed within three years of the date fixed for performance.
- Consider a consumer complaint only if the seller is a builder or service provider. A private individual seller is not covered.
- Settle early if the sum is small. A Rs 1 lakh recovery suit runs three years and costs most of the claim.
FAQ
Is token money refundable if I change my mind?
Usually not in full. If the receipt names a forfeitable amount and it is a reasonable pre-estimate of the seller's loss, expect to lose it. If the receipt is silent, the seller must show breach and loss, and a negotiated part-refund is the common outcome.
The seller backed out. What can I claim?
A full refund, plus interest, plus damages if you can prove them. You may also sue for specific performance to compel the sale, which is often the stronger threat when prices have risen since the agreement.
Can token money be paid in cash?
It should not be. Section 269SS of the Income-tax Act penalises cash of Rs 20,000 or more taken in connection with an immovable property transfer, and the penalty under Section 271D equals the sum received. Beyond the tax exposure, cash leaves you with no proof of payment.
How long does the seller have to refund?
Whatever the agreement says. Where it says nothing, a reasonable period, which in practice means the 15 to 30 days you set out in your demand notice before filing.
Does the broker have to return the commission?
Only if the brokerage terms say so. Most brokers treat the fee as earned on introduction, which is why you should agree in writing that commission is payable on registration, not on the token.
Before you transfer anything
Get the receipt drafted properly, keep the token small, and do the title check first — those three habits prevent almost every dispute in this article. If you are buying a resale in Delhi NCR and want the paperwork looked over before the money moves, Realty Hunting can help you check it.
