What is earnest money?
Also called: earnest money deposit, EMD, advance against agreement, bayana (in larger deals)
When an agreement to sell is signed, the buyer usually pays about 10% of the price as earnest money. The seller can forfeit it if the buyer backs out without a valid reason; otherwise it counts towards the price at registration.
The phrase comes from contract law rather than from brokers. Earnest money is part payment that doubles as a guarantee: the buyer puts money at risk to show that the purchase will be completed. In most Indian resale transactions it is paid on signing the agreement to sell, and 10% of the price is the usual figure, though anything from 5% to 20% turns up depending on how long the gap to registration is.
What sets it apart from an ordinary advance is forfeiture. Section 74 of the Indian Contract Act, 1872 allows reasonable compensation for breach, and courts have long held that money clearly described as earnest money in the agreement can be forfeited if the buyer defaults. The Supreme Court applied that principle in Satish Batra v. Sudhir Rawal (2013). An advance that the agreement does not label as earnest money is treated differently, and a seller who wants to keep it generally has to show actual loss.
Builder cases have gone the other way more often. Consumer commissions have repeatedly refused to let developers keep large sums when a buyer cancels, and around 10% of the basic sale price is the figure they most often accept as reasonable. Clauses letting a builder forfeit 15% or 20% of the total cost, plus brokerage and taxes, are regularly cut down.
For a buyer the practical rule is simple. Pay earnest money only after the title has been checked and the bank has given at least an in-principle sanction. Add a clause that the money is refundable if the loan is refused for reasons tied to the property, such as a defective title or missing approvals, and that the seller must return it with interest, or face a suit for specific performance, if he refuses to execute the sale deed.
On a ₹1.2 crore resale flat in Andheri West, the buyer pays ₹12 lakh as earnest money when the agreement to sell is signed, with registration fixed 60 days later. If the buyer walks away without cause, the agreement lets the seller keep the ₹12 lakh.
Signing an agreement that labels the entire advance as earnest money before the home loan is approved. If the bank then says no, the seller may be entitled to keep all of it.
Questions people ask about earnest money
What is the difference between token money and earnest money?
Token money is a small sum paid to hold the property before any agreement. Earnest money is the larger advance, often 10%, paid when the agreement to sell is signed, and the agreement usually spells out when it can be forfeited.
Can a builder forfeit my whole booking if I cancel?
Consumer commissions have generally held that forfeiting more than about 10% of the basic sale price is unreasonable. Check the cancellation clause in your agreement and the rules of your state RERA.