All you need to know about security deposits and refund clauses in 2024

security deposits and refund clauses

In addition to monthly rent, a rented home needs a security deposit to be given to the landlord. This is done in case there are any unplanned expenses such as damages to the property that has been made by the tenant. This one-time deposit is meant to be returned at the end of the rental period, provided all the terms and conditions in the agreement have been followed.

If you are looking to rent out the property, the thought of putting down a large sum of money as a security deposit can be quite daunting – it’s usually a sum of 2 to 6 months of rent. However, understanding the terms and conditions associated with a security deposit and its refund clauses can help ensure that you don’t lose out on your hard-earned money. In this article, we’ll go over all you need to know about security deposits and refund clauses so you can rent out your new home with confidence.

What is a security deposit?

A security deposit is a sum of money that is paid by the tenant to the landlord of the property that is being rented out. This amount is usually quite a large sum, ranging from 2 to 3 months of rent to a year’s worth of rent. The security deposit is given to the landlord when the tenant moves into the property. It is held with the landlord during the lease tenure and returned to the tenant when the lease is over.

The main use of the security deposit is to protect the landlord against losses that the tenant can cause. The security deposit money is important to guard against unexpected occurrences that could arise during the lease period. For example, if the tenant wants to vacate the property earlier than the decided-upon lock-in period, the landlord could deduct a portion of the security deposit for them defaulting on the rental agreement. The justification for this is that the landlord could have to pay a broker’s fee before the expected time to find a new tenant and therefore is also at risk of losing money. Another example where the landlord could keep a portion or all of the security deposit is if the tenant has caused serious damage to the property or if they do not pay the rent. The security deposit is this used toward repairs of the property or to make up for the lost rent.

When does the security deposit need to be paid?

The security should be paid to the landlord by the tenant in advance. According to the Model Tenancy Act, 2021, the security deposit cannot go above two months of rent for residential properties and over six months of rent for non-residential properties. The security deposit is not taxable. The security deposit will have to be paid back to the tenant within a stated period after the landlord has inspected the property and the tenant has vacated the property.

When can costs be deducted from a security deposit?

Costs that have occurred due to repair for the damage caused by the tenant (for example, drilled holes in the walls, broken glass from windows and any damage due to carelessness or neglect) can be deducted from the security deposit by the landlord.

Costs relating to the wear and tear of the property, such as peeling paint or worn-out cabinet hinges and doors, cannot be deducted from the security deposit.

The amount of security deposit asked by the landlord in order for tenants to rent out their properties varies in India from state to state. Most landlords in metropolitan cities will decide on their security deposits based on the cost of living in that city, the locality that their property is in and the area and quality of the property. So properties that have a high value because of these factors will most likely have a high security deposit.

Demand and supply for rental homes and spaces also play a huge role in how much is expected by landlords for a security deposit. When rental properties are in high demand and there are not many properties available, landlords can ask for high rents and security deposits.

The economics of a city, for example, how much people are earning there, also has an implant on the rents and security deposits asked for. In bigger cosmopolitan cities, where monthly earnings are on the higher side, rents too will be higher, especially in the city centers. Security deposits, which are usually a number of months’ worth or rents, will naturally go up as well.

Take Bangalore as an example. Landlords in this city ask for up to one year’s worth of rent as a security deposit. This is because the demand for good rental accommodation is high and most renters have good salaries and more to spend monthly.

There is a huge disparity in security deposit amounts from state to state, and even city to city, in India. It is expected to smoothen out when Model Tenancy Act gets implemented throughout the country.

Refund of security deposits and other things to remember

Security deposits are there to protect the landlord’s interest in case the property gets damaged by the tenant or the tenant does not pay rent. According to The Model Tenancy Act, the landlord is permitted to deduct costs for repairs as well as rent arrears from the security deposit given by the tenant to them. The landlord will have to pay back the remaining deposit when the lease expires and the tenant has vacated the property.

According to the The Model Tenancy Act, it is the landlord’s responsibility to tend to structural repairs, whitewashing, external electrical wiring, and other maintenance-related issues of the property. This is if no clause for these has been stated in the rent agreement.

It is the tenant’s responsiblility to see to the day-to-day maintenance of the property. These responsibilities include cleaning of the drains, repairs regarding switches and sockets, kitchen fixtures and glass of windows, doors, etc. The garden areas and open spaces of the property will also have to be maintained and the general wear and tear in the house needs to be taken care of by the tenant.

For these reasons above, a solid rental agreement needs to be drawn out and agreed upon before the property is occupied by the tenant. This will avoid any disputes later on in the tenancy. The agreement should be reviewed carefully and signed by both, the landlord and the tenants. It should outline the responsibilities of the tenant and landlord toward the upkeep of the house, maintenance, repairs, bills, etc. It should clearly mentioned the security depository sum amount. It has to be registered at the sub-registrar office to be legally binding.

The Model Tenancy Act and security deposits

In June 2021, the Union Cabinet approved the Model Tenancy Act 2021, which was to be followed by states individually. This Act governs the rights and duties of both the tenant and the landlord fairly. Here are some important points from the act.

  • It aims to equally and fairly take into account the rights of both the landlord and the tenant. Previously, it was thought that the landlords rights were usually favored over the tenant’s rights, especially with regards to recovery of the security deposit.
  • The Act promotes signing of a rental agreement by the owner of the property and the tenant and that this contract should state all the conditions and clauses agreed upon by both parties.
  • According to the Act, the tenant has to give a security deposit that is equal to rent of two months for residential property. The security deposit amount should be equal to six months’ rent if it is a commercial property.
  • It is the owner’s responsibility to arrange the whitewashing of walls, painting of doors and windows, and repair structural damage to the property.
  • The landlord is allowed to adjust the security deposit amount when rent has not been paid or intentional damage has been made to the property. The landlord should refund the balance to the tenant when the property is being vacated.
  • If the tenant does not abide by the tenure that is stated in the agreement and does not vacate, the landlord has the ability to double the monthly rent for the first two months. The landlord can increase it to four times as much after the first two months. This is only applicable when the landlord has followed all the conditions of the contract.
  • All the terms and conditions should be clearly stated in the agreement to avoid any dispute. In case of any dispute, the court can still be approached.

What are the limits on security deposits under Model Tenancy law?

Here is a summary of of limits on security deposits under the Model Tenancy Act:

  • The security deposit should not exceed two months’ rent, in case of residential premises.
  • The security deposit should not exceed six months’ rent, in case of non-residential premises.

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