What is Token Money and How to Use it?

Understanding the meaning of token money is vital if you are planning for real estate purchases and others. It enables you to formalise a transaction by transferring a small amount to the seller’s account. 

This procedure can be recorded as an agreement in your deal with the seller. While it is not a compulsory process or mandate by law, it is common practice as a part of the sale. To learn what token money is to streamline your finances, read on.

Understanding the Concept of Token Money

In order to assure your interest, a percentage of the sales amount paid to the seller beforehand is the token amount. You can negotiate the token amount with the seller to decide the percentage of the total amount payable.

The amount you pay as a token is part of the total payment amount. When making the final payment, you will have to pay a deducted sum. However, it is essential to note that this is non-refundable. You may have to forfeit the token amount if you fail to make the rest of the payment.

Important Factors to Consider

Before you pay the token amount when making any purchase, consider the following components to make the procedure safe and smooth:

Register a Sale Agreement 

Generally, you need to execute this paperwork using stamp paper having a value equivalent to 0-1% of the sale value. It is a legal document giving essential rights to the related parties. Any breach in terms and conditions related to the agreement is considered as a breach of contract. 

Sign a Memorandum of Understanding (MoU)

While this isn’t considered a legal document, it represents an agreement between the parties. This can include the intent, desire or will of the related parties on a common line of interest. Despite not having a legal agreement, it doesn’t signify that money paid under an MoU isn’t safe. 

It is advisable to notarise the MoU when paying the token amount. This process makes it binding and secure, safeguarding you from legal disputes.

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Get a Payment Receipt

As both parties may have hesitation about the other party backing out, buyers generally pay the token amount for a very short duration. Getting a payment receipt provides an assurance of payment of this amount. Depending on the state government rule, you can get it on a ₹2 or ₹10 stamp paper. The buyer and the seller acknowledge the receipt of the token amount payment by signing on it.

Points to Include

When preparing the above-mentioned documents, it is crucial to include essential details relating to the buyer, seller and the purchase. The following are several points to include to protect your interest as a buyer:

• Include the complete property details
• Include all the necessary details like name, address, father’s name of both the buyer and the seller
• In case of death of the buyer/seller, the immediate heirs have the same rights
• Include a termination clause and mention in the MoU the conditions under which the agreement can be terminated
• Include proper clause regarding refund
• Include clauses like the seller can’t sell the property till the MoU is in place
• Mention the value of the token amount which you both have mutually agreed upon
• Include the terms and conditions in the MoU, like a timeline of payments

Knowing the token money meaning and considering the dos and don’ts, you can negotiate better deals and prevent fraud. While it is a vital step representing your seriousness, the process may require a large sum that you need to pay upfront. 

In that case, opting for the Fibe Instant Personal Loan can be a smart choice. We offer you a loan of up to ₹5 lakhs and flexibility with customisable tenures. You can enjoy competitive interest rates without requiring any collateral. You can use the funds without any restrictions and pre-close the loan at no additional cost.

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FAQs on Token Money

Is token money a mandatory part of financial transactions?

The legal system in India doesn’t mandate the payment of token money. However, sellers usually demand it to have an assurance of payment of the remaining and completion of the sale of high-value products or properties.

Is there a legal requirement for token money in transactions?

You can get a payment receipt or sales agreement to legalise your token money payment.

What happens if the seller refuses to return the token money?

If you’ve added the refund clause in your sales agreement, you can send a legal notice if the seller refuses to refund the token money.

Can token money be used in business contracts?

Yes, token money can be used in business contracts. It binds both parties to the agreement and shows the buyer’s intention to purchase a property.

How long is token money held during a deal?

The payment of the token money can be held up to the transaction’s closing during a deal.