A Guide to Cash Transactions in Indian Property Deals

Introduction

Buying or selling property in India often involves cash transactions. While these may seem convenient or beneficial in the short term, they come with serious legal and financial risks. Understanding how these transactions work and their consequences is crucial to protecting your finances and staying on the right side of the law. This article explains why cash transactions happen, the challenges they create, and how buyers and sellers can manage property deals safely.

Why Sellers Choose Cash Transactions

Sellers in the Indian property market often prefer cash payments for various reasons, especially related to taxes and market practices. Heres why:

Who Are the Sellers?

1. Resellers: Individuals selling property they already own.

2. Builders: Developers selling new or multiple properties.

Why Cash Payments Are Attractive to Sellers

1. Tax Savings:

• Sellers who bought property with cash may be unable to show its full purchase cost officially. Accepting cash helps them underreport profits and save on taxes.

2. Avoiding Reporting Requirements:

• Cash payments leave no paper trail, enabling sellers to reduce taxable income and remain in lower tax brackets.

3. Market Practices:

• Builders often rely on cash payments to quickly cover costs such as materials, labor, and regulatory approvals.

Challenges for Sellers

While cash transactions may seem appealing, they also come with significant risks:

1. Income Tax Scrutiny:

• Depositing large cash amounts can attract the attention of tax authorities. Splitting deposits into smaller amounts or transferring funds to relatives’ accounts is also risky, as cash loans over ?10,000 are illegal.

2. Issues for NRIs:

• Non-Resident Indians (NRIs) face difficulties transferring cash earnings abroad without proper documentation, such as Forms 15CB and 15CA.

3. Future Tax Problems:

• Undocumented cash cannot be included in the property’s purchase cost during future sales, which leads to higher taxes on capital gains.

Why Buyers Use Cash Transactions

From a buyer’s perspective, cash deals might seem appealing but often come with significant risks. Here’s why some buyers opt for cash payments:

Why Cash Is Attractive to Buyers

1. Lower Stamp Duty:

• Declaring a lower property value reduces the stamp duty payable, saving around 6-7% of the transaction value.

2. Using Unaccounted Cash:

• Buyers with undeclared money may prefer cash transactions to avoid depositing the funds in a bank and triggering tax inquiries.

Risks Buyers Face in Cash Transactions

Immediate Risks:

1. Tax Investigations:

• Banks monitor large cash deposits or withdrawals. If flagged, buyers may face tax inquiries and have to explain the source of their funds.

2. Loan Challenges:

• Declaring a lower property value on paper reduces the loan amount a buyer can secure, leading to higher out-of-pocket expenses.

3. Financial Strain:

• Paying a large sum in cash can drain savings, leaving buyers financially vulnerable in emergencies.

Long-Term Risks:

1. Resale Complications:

• Undocumented cash payments cannot be included in the property’s cost during resale, leading to higher taxes on capital gains.

2. Reduced Financial Transparency:

• Cash transactions damage financial credibility and can create problems during audits or when applying for loans.

How to Avoid Risks in Property Transactions

Both buyers and sellers can take steps to avoid the pitfalls of cash transactions and stay legally compliant.

For Sellers: Tips to Stay Legal

1. Claim Tax Deductions:

Reduce taxable income by claiming deductions for:

• Brokerage Fees: Maintain receipts for brokerage payments.
• Travel and Legal Costs: Particularly useful for NRIs, these expenses can lower taxes.
• Property Improvements: Record all renovations and upgrades, as they offset taxable profits.

2. Separate Agreements for Fixtures:

• If selling furniture or appliances, create a separate sale agreement. This reduces the taxable value of the property.

3. Use Tax Exemptions:

• Section 54: Reinvest profits in another residential property to avoid capital gains tax.
• Capital Gains Account Scheme: If reinvestment isn’t immediate, park funds in this account to defer taxes.

For Buyers: Tips for Safe Transactions

1. Insist on Fully Documented Deals:

• Avoid cash payments and explain the risks to sellers, including legal penalties and tax complications.

2. Use Home Loans:

Home loans reduce financial strain and offer tax benefits:

• Section 80C: Deduction on principal repayment.
• Section 24(b): Deduction on interest payments.

3. Document Fixtures Separately:

• Ensure movable items, like furniture, are covered in a separate agreement to maintain transparency.

Benefits of Transparent Transactions

Opting for fully documented and legal property transactions has several long-term advantages:

1. Legal and Financial Safety:

• Transparent deals prevent audits, penalties, and legal issues, ensuring smoother processes and peace of mind.

2. Easier Future Sales:

• Proper documentation reduces capital gains taxes during resale and avoids disputes.

3. Improved Credibility:

• Clear and honest transactions build trust and improve financial standing, making it easier to secure future loans or pass audits.

Conclusion

Property transactions without cash payments are safer, smarter, and fully compliant with the law. While cash deals might seem tempting, the risks—such as tax scrutiny, penalties, and long-term complications—far outweigh any short-term benefits. By focusing on transparency, utilizing tax exemptions, and opting for home loans, buyers and sellers can protect their financial future and avoid legal troubles. Clean and documented transactions provide peace of mind and long-term financial stability for everyone involved.

About the Author

CA Arun Tiwari, a Chartered Accountant and former EY employee, is the Chief Consultant of the NRI Desk and Influencer Desk at AKT Associates. Specializing in consultancy services for NRIs, he also creates educational content to empower the NRI community.