Token money: Its meaning, importance, and points to note

Token money: Its meaning, importance, and points to note

Financial Planning | May 23, 2022 | 10 min read

The token money is not a mandate by the law but is a general practice irrespective of property type. In this blog, we will learn more about token money, its importance, and points to note while paying or receiving token money.

Once a buyer finalizes a home deal with the seller, the next step is to initiate a formal process to conclude it legally. This begins with the buyer transferring a small amount of the transaction value to the seller to show their genuine interest. This advance amount or part of a sale consideration amount given by the buyer as an assurance is known as token money.

What is token money?

Buying a house is often complicated and requires us to understand the legal procedures around house buying. If you are considering buying a house, there are chances that you will come across the word “Token money”. It is the part of the sales consideration amount paid in advance by the buyer to the seller as part of closing the deal. However, there is no mandate in the law regarding this but it is often demanded by the seller as an assurance of the buyer’s genuine interest. There are certain factors to be considered while paying token money.

When is the token money paid?

The token money is paid when the buyer and the seller reach a verbal agreement to finalize the deal. At this stage, the legal paperwork for purchasing the house is yet to begin. In order to get assurance, advance payment is demanded by the seller from the buyer. General practice is that if the buyer backs out from the deal, the entire amount is forfeited by the buyer unless there is a legal document suggesting otherwise. However, if the seller is unable to complete the transaction, they have to return the entire amount to the buyer.

How much money is to be paid as a token amount?

Since it is not a mandate by law, there are no fixed rules pertaining to the amount the buyer should transfer to the seller as token money. The amount paid as a token varies from case to case. An example of this would be if a buyer plans to purchase a property worth INR 1 Crore, and he would pay INR 16 Lakhs from his own pocket, then a sum of INR 2 Lakhs will be paid as token money to the buyer. Please note that this INR 2 Lakhs is a part of the buyer’s down payment and now the buyer has to pay only the remaining INR 14 Lakhs during the final transaction.

Points to note while paying token money

Let us take a look at the points that you must keep at the back of your head while making advance payment:

Keep evidence of the transaction

Always have proof of making the payment either in the form of a receipt or a Memorandum of Understanding (MOU) that states that the seller has received the money. While signing the MOU, check if the following details are present correctly – information about the buyer and seller, property details, payment details, timeline, and clause of termination.

Always pay token money in the presence of a witness

To reduce the risk of fraud, always pay it in the presence of a witness. If possible, sign the agreement papers in the presence of two witnesses. It helps in case there is a dispute between the buyer and the seller, the buyer will have someone who can vouch for the authenticity of the deal.

Avoid paying token money in cash

It is highly recommended to pay it through a bank and strictly avoid any cash payments as it involves a huge risk. Making payments using cash is considered to be a crime. Online transactions are often safer than offline transactions. Keep it as low as possible by negotiating with the seller and coming to an agreement.

Be aware of your rights while paying token money

The seller of the property is not allowed to sell the property to some other buyer after receiving the token money. In case of death of either party, the rights are passed on to their legal heir.

Conclusion

Token money is a general norm and cannot be avoided if you plan to purchase a house. Always remember, it should only be paid once you have the funds arranged for the entire transaction or have the clarity to do so. If the buyer fails to arrange the required funds, then they are at risk of losing the entire amount. Paying the amount is often mandatory as the seller will not share the documents required to initiate home loan processing unless they receive an advance amount. Since the token transaction happens without any legal formalities, buyers should be extremely cautious and do thorough research on the seller before making any commitments.

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