Is It Legal to Take Token Money Without an Agreement in India?

By NyayKart Legal Team - Experts in RERA, consumer disputes and property law across India.

Introduction

In everyday transactions - especially in real estate, rental arrangements and informal commercial deals-parties often exchange a small amount of money upfront known as “token money,” “bayana” or “advance payment.” This amount is usually paid to show genuine intention to proceed with a transaction.

However, an important legal question arises:

Is it legal to take or give token money without a written agreement in India?

If yes, what are the legal risks, consequences and protections available under law?

This article explains the issue in detail, covering contract law, real estate practices, RERA provisions, case law, risks and best practices.

What Is Token Money?

Token money is a small upfront payment made to demonstrate seriousness and commitment toward a proposed transaction. It is commonly used in:

• Property transactions (buyer-seller negotiations),

• Rental arrangements (booking amount),

• Business or service contracts (earnest money).

  
  

There is no fixed percentage or statutory requirement under Indian law mandating token money. It is a commercial practice, not a legal necessity.

In India, token money may also be referred to as:

• Earnest deposit

• Advance deposit

• Binder

• Bayana

Token Money vs Advance Payment (Important Legal Difference)

Token Money	Advance Payment
Shows intention to proceed	Part of total consideration
Usually small amount	Often substantial
May be forfeited	Refund depends on contract
Weak enforceability	Stronger legal rights

Courts decide the nature of payment based on intention of parties, amount paid and surrounding circumstances, not merely the label used.

Legal Position Under the Indian Contract Act, 1872

Under the Indian Contract Act, 1872, an agreement becomes a valid contract only if it includes:

1. Offer and acceptance

2. Lawful consideration

3. Free consent

4. Competent parties

5. Lawful object

6. Not expressly declared void

Important Clarification

Payment of token money alone does not automatically create a binding contract. A mere exchange of money without clear terms, consent and obligations does not guarantee enforceability.

Is It Legal to Take Token Money Without a Written Agreement?

Yes. Taking token money without a written agreement is legal in India.

However, important legal realities apply:

• Oral agreements are legally valid in India; however, transfer of ownership in immovable property requires a written and registered instrument.

• The problem is proof, not legality.

• Without written evidence, it becomes extremely difficult to prove terms, refund conditions or obligations in court.

Practical Example

If a buyer pays token money before executing a sale agreement and the deal later collapses, claiming a refund or enforcing the transaction becomes difficult unless terms were documented.

Real-World Legal Implications

1. Enforceability in Court

Courts prefer documentary evidence. The following can help establish intent:

• Token money receipt

• Bank transfer proof

• Emails or WhatsApp messages

• Notarized acknowledgments

However, these are weaker than a formal written agreement.

2. Risk of Forfeiture

If the buyer backs out:

• The seller may forfeit token money,

• Unless refund terms were agreed or seller is at fault.

Indian courts often uphold forfeiture if:

• Payment was made knowingly,

• Buyer defaulted without justification.

  Courts generally do not permit forfeiture of an unreasonable or excessive amount unless actual loss is proved.

3. If Seller Misuses or Runs Away With Token Money

A buyer may:

• File a civil recovery suit,

• Rely on bank records or written communication,

• Invoke consumer protection laws where applicable.

Criminal Liability

If token money was taken with dishonest intention, criminal provisions may apply:

• Section 406 IPC - Criminal breach of trust

• Section 420 IPC - Cheating

Limitation Period:

A suit for recovery of token money must generally be filed within 3 years from the date the cause of action arises, as per the Limitation Act, 1963.

Mohd. Rehan vs. Sudarshan (2014)

The court held that the nature of token money or advance depends on the intention of parties and surrounding circumstances, not merely the name given to the payment.

Courts examine:

• Intention of parties

• Amount paid

• Conduct and communication

• Whether payment formed part of consideration

Special Considerations: RERA Provisions

Under the Real Estate (Regulation and Development) Act, 2016 (RERA):

• A builder/promoter cannot collect more than 10% of the property value before executing a registered Agreement for Sale

• Amount must be deposited in a designated escrow account

• Applies only to builders/promoters, not resale transactions

RERA does NOT apply to private resale sellers

Practical Risks of Taking Token Money Without Agreement

1. Difficulty in proving terms

2. Refund and forfeiture disputes

3. Fraud and misrepresentation risks

4. Tax and accounting complications

5. Lengthy litigation due to lack of documents

Best Practices Before Paying or Collecting Token Money

• Always issue or demand a receipt

• Prefer written understanding, even if brief

• Use digital payments for traceability

• Clearly mention refund and forfeiture conditions

• Keep token money minimal until agreement is executed

• Seek legal advice in property transactions

Conclusion

Taking or giving token money without a written agreement is not illegal in India, but it is legally risky. Token money by itself does not create automatic or enforceable rights. With proper receipts, written and legal clarity, token money can safely support a transaction instead of becoming a dispute.

Frequently Asked Questions (FAQs)

1. Is token money legally binding without an agreement?

No. Token money alone does not create a binding contract unless contractual essentials are proved.

2. Can a seller keep token money if I back out?

Yes. In many cases, sellers can legally forfeit token money if the buyer defaults.

3. What if the seller runs away with token money?

A civil recovery suit can be filed; criminal action may apply in cases of fraud.

4. Does RERA regulate token money?

Yes, but only for builders/promoters - not resale properties.

5. Are verbal token money deals enforceable?

Yes, oral agreements are legally valid but very difficult to prove, making enforcement challenging.

How NyayKart Can Help

Facing possession delays? The NyayKart Legal Team provides end-to-end RERA support: drafting legal notices, filing complaints, representing before authorities and enforcing refund or compensation orders.

📞 Book a free consultation today to assess your case and protect your rights under RERA.