Cash Payment in Property Deal – Beware of Black Money

Builder is asking for a Cash Payment in a Property Deal. One of the clients told me recently. I suggested against cash payment; he said that he will never be able to close a property deal. From this interaction, you can gauge the menace of black money in Indian Economy. Sometimes knowingly or unknowingly a buyer generate black money through cash payment. Another primary concern of my blog readers in small towns/semi-urban/rural areas is a lack of trust factor between buyer and the seller. In large no of cases, the cheque bounce after the property deal is completed. In this scenario, it becomes tough for a seller to recover the money from the buyer.

For the knowledge of readers of this blog, in small towns and semi-urban areas, the “possession of property” also known as “Kabza” in Hindi is proof of ownership. In most of these towns, the property records are not computerized. I was just highlighting the case when unknowingly the buyer is generating black money. Whatever the case may be i don’t support, recommend or suggest any cash payment in a property deal. It is illegal and risky for the buyer.

One of my clients asked me so it means i cannot pay a single rupee in cash :). His concern was token money. I said you could pay up to Rs 20,000 in cash as Cash in Advance or a Token Money. In case deal is cancelled then you cannot receive it back in CASH. This provision is kept to take care of operational difficulty in paying the advance or “Bayana” as it is popularly called in Hindi.

Another major confusion among buyers is between a cash payment and quoting of PAN in a property deal. To clarify, it is mandatory to quote PAN for sale/purchase of immovable property exceeding Rs 10 lakh. It should not be confused with cash payment. In layman terms, max cash payment allowed is only Rs 20,000. The sellers mislead the buyers by quoting that cash payment of 10 lakh is permitted in a property deal. It is not true.

How builder/seller lure buyers for Cash Payment in a Property Deal?

1. Save Stamp Duty and Registration Charges: As i mentioned in my previous posts that stamp duty and registration charges are a substantial amount. I shared in my post that you can save stamp duty and registration charges in a legitimate way. The biggest trump card of a builder or seller is that buyer need not pay stamp duty on cash payment. In many cases, the buyer is not comfortable with a cash payment, but a carrot of savings in stamp duty is tempting enough for a buyer.

As a buyer, you can always save stamp duty through legal and rightful manner. Any cash payment means high risk, and i will share the risks later in the post. Also, it is against the law, and you are an equal partner in crime i.e. circulation of black money.

2. Discount: Another common way to lure the buyers for cash payment in a property deal. Normally builder/seller offer a discount of 5%-10% on cash payment. Generally, Black money is a chain reaction. Builder receives because they also need to pay to suppliers/bribe. It’s cancer and should be stopped at the point of origin. If all the buyers of a property decide that they will not encourage this practice, then it will help to clean the system. It requires a collective effort.

3. Capital Gain Tax: In the case of resale property, a seller demand cash payment to avoid capital gain tax. A property is registered at circle rate/guidance value. The balance amount is received in cash from the buyer. It is a very high-risk transaction for a buyer. The seller tells the buyer that buyer can also save capital gain tax at the time of future sale. It is not true. In fact with strict laws on black money, a buyer has to accept 100% payment through cheque in future when he will decide to sell. It will increase his capital gain liability manifold. In layman terms, the capital gain tax saved by the current seller will be paid by the buyer when he will sell the property.

To explain with an example, assuming current seller bought property at 20 Lac and selling at 40 lac. For simplicity purpose, he is incurring short-term capital gain of 20 lac. Now he insists buyer pay 10 lac in cash and buyer oblige. In this case, current seller’s short capital gain in property deal will reduce to 10 lac from 20 lac i.e. savings of 10 lac in capital gain. The cost of acquisition for the current buyer will be 30 lac.

Let say current buyer decide to sell after two years for 50 lac. In this case, short-term capital for a buyer will be 20 lac i.e. 50 lac minus 30 lac. Now if he would have paid full money through cheque, then his cost of acquisition would have been 40 lac. The capital gain will be 10 lac, but now it is 20 lac i.e. 10 lac more. Therefore, as i mentioned that capital gain saved by the current seller will be paid by the current buyer in future.

Cash Payment in Property Deal – High Risk for a Buyer

Last year in Delhi and NCR alone, 1200+ fraud cases were filed by buyers who were trapped in cash payment in a property deal. The modus operandi of property deal is that a temporary or “Kachha” agreement as it is called in Hindi is signed between the seller and the buyer. This agreement contains FULL Value of a property deal. For example, if buyer and seller agreed to property deal of 50 lac. Out of 50 lac, it is agreed that 15 lac will be a cash payment, and 35 lac will be through cheque.

On the day of property registration or before that buyer will pay 15 lac in cash to the seller. Now the sale deed will be registered at 35 Lac, and this kachha agreement will be destroyed once the property deal is completed. In this entire transaction, there is NO MENTION of 15 lac cash payment.

Now you must be wondering where are the chances of fraud. In this case, after the property deal, seller produced the copy of kachha agreement in front of police and told that buyer is not paying balance 15 lac. Stumped…In some cases, seller blackmailed buyer and negotiated for an additional sum. Typically a seller tells the buyer that kachha agreement is legally invalid, but it is not true. Only the name is Kachcha or temporary agreement, but legally it is Pakka Agreement :). In this case, the buyer cannot claim that he has paid 15 lac in cash. Therefore, you can be trapped in this entire property deal.

Moreover, if God forbids something goes wrong after the payment of cash say the deal is cancelled, or something happens to the seller. In one of the case, the complainant paid cash on the day of registration. On the way to sub registrar office, the seller died in an accident. It is highly unlikely scenario but a possibility. Now the total cash component is gone for the buyer. If property deal is cancelled, then it is impossible to recover the cash component from the seller.

Penalty for Cash Payment in Property Deal

The biggest misconception of any buyer or seller is that how the income tax department will come to know about the cash payment. Please remove this misunderstanding from your end. Once this misconception is cleared, let’s discuss the penalty on Cash Payment that can be levied by income tax department. A Penalty of 100% can be levied on Cash Payment. A penalty will be applicable on Seller. An action can be taken against buyer also. Therefore, in the example mentioned above, if the seller receives 15 lac as a cash payment, a penalty of equivalent amount i.e. 15 lac can be imposed on Seller.

As a buyer, you have to decide whether you would like to take a risk in property deal as i highlighted. Also, note that all the cash transactions are being monitored. Any unusual cash transactions from a bank account will immediately put you under the scrutiny of income tax department. I am not creating fear but requesting all the readers not to encourage illegal practices. Be a good citizen of India and make all payments through legal channel. Any cash transaction of more than 20,000 should be done responsibly and carefully. Also, remember that by doing this you will be helping govt of India in curbing BLACK MONEY.

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