How you become a loser when you pay in black for your real estate property ?

Naresh recently visited a new residential project in Pune which was ready for possession. The property cost was in his budget and he was about to finalize the deal. The total cost of property was around Rs 40 lacs. Stamp duty and Registration cost was to be paid separately which would take total cost to around 43 lacs. This was a bit heavy on Naresh pocket, so out of his regular habit, he inquired if there is any trick by which he can save some money on the deal ?

Bought house by paying in black

The builder was quick to give him a great saving advice“Sir , You have to pay 6% stamp duty and 1% registration cost on the agreement price. Which comes to 7% of 40 lacs, thats 2.8 lacs additional, thats the reason the total cost comes around 43 lacs . Now if you want to save money, what you can do is pay some part of the deal in cash to us (means pay in black) and we will reduce the agreement cost by that much, that way – we will also save our tax on the black money part and you will save 7% on that cash amount. Like if you pay us Rs 10 lacs in Cash, then we will make the agreement for Rs 30 lacs only and you will have to pay stamp duty and registration cost on only 30 lacs which will be 2.1 lacs, and it will save you Rs 70,000 without doing anything extra ! . Cool na ! .”

The offer was tempting and Naresh fell for it, how cool is saving Rs 70,000 , all you need to do is pay some part in cash and lower the agreement amount in records. But do you understand, what is your loss in long term because of this kind of deal ? Let me break some hearts today, who have already done this mistake while buying their properties.

Stamp duty and Registration Costs

First understand that stamp duty and registration costs vary from one state to other state. For example – In Maharashtra, its 6% + 1% = 7% in total , so whatever is your total agreement cost , you will have to bear additional 7% on that amount as stamp duty + registration costs. Given the huge amount involved and the financial crunch every buyer faces at the last moment of the deal and hunger of builders to save every bit of tax, makes sure that buyers fall for this trick of paying huge amount in CASH (black money) and register the property at lower price just for few thousands (actually sizable if you look at it). This looks like win-win situation to buyers and they are pretty happy about it, however truly speaking, this is a loosing deal for the buyers in a very long run (if you are going to sell the property later) and only benefits the builders and let me now explain you why is it so ?

At the time of selling – The cost of house matters 

I hope you are very clear that when you sell your property in future , you pay the tax on the profits made. And the profit is decided by your COST of the house and the sell price. So lower the cost of your house, the higher the profits on paper for you in future. You might be aware of the fact that indexation is applied in case of real estate transactions and 20% tax is paid on the profit.

Now lets take this same example we are discussing and see how much you save at the time of purchase and how much you loose at the time of selling , which can be in distant future. See the working below and try to understand the whole situation

How paying black money in real estate transaction can lead to loss in long term

In the example above you can clearly see that by paying Rs 10 lacs in cash, a person is able to save Rs 70,000 instantly. However they are not able to look beyond the obvious and visualize the kind of loss they will incur in future when they decide to sell the property. The same person will pay 3.4 lacs of additional tax in future because he/she paid Rs 10 lacs in cash years back.

Now there are few points which can be debated here like there can be changes in laws in future, or one can save the tax by investing in another real estate properties (which again depends on future laws) , but the point here is to educate you on the long term implications    of this. Now if you fully understand the message of this post, you can take your decisions with full responsibility.

Whats your take on this ?

189 CommentsAdd Comment

  1. param2u

    Very pleased to see this blog from Manish Chauhan.
    I believe in this 101%, as a matter of fact I have purchased agriculture land by paying complete cheque payments and not a single rupee in cash,.The problem i faced was that I ended up paying more than circle rate in stamp duties, as the circle rate is usually quite less than the market price in terms of agriculture land.Nevertheless i still went ahead and did a complete white transaction. This has given me peace of mind, I suggest everyone try and do a full cheque deal.Not only is this the law, it also avoids lot of social evils related to black money and one contributes towards the development of their state and Country.

  2. Shyam

    Appreciate your guts in addressing such a controversial issue. I’m adding my take here, hoping it helps further brainstorming within the community –
    – Individual-Individual sales: You are in control of everything. All you have to do is convince the other side to “Not be so greedy, Not cheat OUR government”. It may eat a little into your profits, but easy. If you are talking about this case, consider the case closed (at least from my end).
    – Individual-Corp sales: By Corp, I mean all the builders, developers, buyers/sellers who deal with real estate for life. Individual has enough power pick the right Corp/Property for business, but has less to no power on HOW part of business. This is a BIG case of interest for the Govt as well (Manmohan estimated that this is accounting for big portion of total-daily-transations-in-india, tried fixing it albeit not fully). It’d be interesting to see initiatives on incentivizing Corps for following and cultivating transparency (to govt) in business. I would love to see your thoughts, than the empty ‘Thank you’ messages.

  3. rsb

    In fact investing in property is not worth the pain anymore. If it is a built up property then property taxes, maintenance and repairs are a net loss. The rent earned/saved is far less than the interest a bank would give. Besides having to bribe the government officials and service charges of lawyers/others it only adds to the overall cost of owning and selling property.

    Empty land if located in a good area risks being encroached on or the owners being bullied to sell it off. This again results in a loss to the owner. And finally getting a buyer for the so called market value is a rare case. Some buyers just pay some advance and lock down the owner from selling to anyone else.

  4. Pramos

    Hi Manish,
    My friend has 10 lacks rupees in cash out of it 6 lacs is in FD on which he is getting 6000 rupees interest monthly . Now he planning to buy a flat which is cost around 24 lacs without stamp duty and registration. Which will be a good option for him,
    1. Keep FD active and get full amount home loan
    2. Break the FD and pay 10lacs in black or white and take home loan for remaining amount

  5. faruk

    Why shall i will take white when I sale in future I will show value 70 L and will take 20 Cash ?
    2ND 98% builders,resalers ask cash >40% only Jantri is white no other option …

    Good to Talk and good on paper but not practical every where

  6. Vishal Kumar

    The people who do not have any cash in hand are facing tough time for buying a house due to cash component.

  7. Prasanna

    Anyone know how to stop this! Boycott the purchase…. impossible! Best thing is to track the purchaser’s transactions. I am sure he/she would have withdrawn large amount of money to give it cash… take this into account along with the loan gotten. If the discrepancy is found then don’t harass the buyer, but grill the seller.

    • paramvir

      hi if anyone registers below circle rate it is illegal according to Indian stamp Act and you will be prosecuted under sections 47-A (1 to 4) , you mightbe kevied a fine upto 10 times the stamp value and not to forget sleepless nights fighting a legal case and also will not be able to sell that property untill the case is settled. I speak this from experience in handling under-valued property related cases. Good luck

  8. bharat

    Than how can I show 10 lacs legally. or I have to register it on circle rate but show only 6 lacs legally means I show that I buy property in 6 lacs . but I pay the stamp duty etc on 16 lacs.

  9. bharat

    I am buying a property(floor) costs 41 lacs. and I paid 35 lacs in cash contracted on stamp paper.Circle rate is 16 lacs. At the time of registry I will pay 6 lacs in cheque.
    Will I pay registry and stamp duty on 6 lacs or 16 lacs. And if it will pay on 16 lacs then how can I show 10 lacs on the time of registry. Can I show it(10 lacs) cash at time of registry behalf of that byana agreement.

  10. Manoj

    Hello Manish,
    Your views on this matter please.
    I am an NRI wanting to sell some ancestral property held jointly with resident Indian siblings. We all would like to conduct the entire transaction in cheque, declare income, pay taxes, etc.

    The buyers though insist on registration at circle rate which is 30% lower than the market rate. And, pay 30% in cheque and the remaining 70% in cash.

    Can I show the entire amount (received in cheque+cash) as capital gains?

    Thank you


    • Manoj

      I think this qualifies for a discussion with a good CA . If you are paying in CASH , then you cant show it legally because there is no proof . If you want, I can connect you to a good CA and you can take it forward with him, he would charge a fees for that!


    • VinManHBK007

      If this 70% cash is less than 2 lakhs then i think you can get the same deposited in NRO account of yours and show as Indian income and below the annual taxable amount. This can get it converted to white as well. What do you all say ? Am I thinking right ?

  11. laxmi mallick

    I payed rs 1o lac to a developer in Navi Mumbai in Cash . The developer give me receipt .

    Is the amount is treated as black money.
    As Mumbai police circular , they honour the receipt of payment

    Laxmi Mallick
    101 Suman Apt,Plot 120 Sector 21, Nerul 400706

  12. Simant

    The article and all the various scenarios presented in the comments seem valid .. but when push comes to shove, in case someone is offering the same deal in both – completely white & white with black component – which one would you go for ?

    I am a salaried guy with complete white liquidity so I would go for the 100% white situation .. would love to hear what others have to say.


  13. antony

    The black money situation is very bad in India. Govt claims they will bring back black money from foreign bank accounts, but in reality 1000 times that amount of black money exists here in India itself. All the black money is going into real estate.

    The rich land owners/builder demand almonst 40% to 50% in cash; otherwise, they are not willing to sell. The poor middle class pay cash component and make their hard-earned white money black. This benefits the seller/builder and helps him avoid capital gains tax. So, rich become richer and poor become poorer

    Govt is simply not interested in tackling black money. They only talk about black money during election time. Govt should reduce capital gains tax to reduce black money circulation.

  14. antony

    As per my experience searching properties to buy in bangalore, 95% sellers want some part to be paid in cash. In bangalore, there is a guidance value fixed by govt for every location. Properties cannot be registered below guidace value. Seller wants to show sale value exactly equal to/slightly above guidance value, and the remaining amount they want cash.

    For example, if guidance value for a particular locality is Rs.1000 per sqft, and market price is Rs.2000 per sqft. Here, if plot measures 1200 sqft, then govt value for plot is Rs.12 lakh. But market price and total transaction value is Rs.24 lakh. So, now seller insists that property be registered for Rs.13 lakh value only, which is rs.1 lakh more than govt guidance value, so legally possible to register. Seller insists that remaining Rs. 11 lakh be paid in cash. And buyer has to pay the 7% registration cost only for Rs.13 lakh. They refuse to register property for whole Rs.24 lakh. They will not sell to you, if you insist on registering for whole amount.

    This is because they want to avoid the 30% capital gains tax on profit from sale. It is the high capital gains tax which is responsible for black money, not the stamp duty/registration cost of 7%.

    The situation is so bad in bangalore that it is impossible to buy property with complete white money. Not all properties will suit your requirement, location, and budget and very few have proper documents, and those that match your requirement, location, and budget and have clear documents will be few only, and those few property sellers inisit on huge black component. So, situation is bleak for those who have white money only.

    But black money has a lot of problems too. If it is white money, you can easily deposit it in bank account and earn meagre interest without fear. But if you have black money, it has to be kept at home, which is a risk, and if there is a IT raid, you will lose all of it and also pay additional penalty.

  15. Fred

    Quite informative Manish. I was ignoring most of these things till now. I have a question which might sound a bit silly. What is the best way to get the circle rate in a given city?

  16. Arpit Kumar

    As long as the circle rates in all cities/towns stay SUPER LOW (as they are now), every buyer and seller will try to avoid paying taxes and stamp duties.

    And (in case 2) if you invest the 70000 amount somewhere for 10% (compounded annually), then after 7 years you will make around 340000 [70000 x PVIFA(10%,7 years)]!!! So that will compensate the long term loss of 342000 in case he has to sell the house for full white after 7 years.

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