Understanding Security Deposit in Rent Agreement & Its Refund Faststep Infra Design Pvt. Ltd

The rental housing demand in India is growing by the year, and for many practical reasons, families choose to rent homes instead of buying their own. The migratory crowd in the country keeps moving between metros and tier I and tier II cities for better employment opportunities, education, and a generally enhanced quality of living.Understanding Security Deposit in Rent Agreement

If you are a renter in India, then you should know the nuances of security deposit for rent. 

Tenants frequently encounter an extra financial obligation referred to as the security deposit. This expense greatly differs across different rental markets, with some unregulated markets requiring up to a year’s worth of rent as a deposit.Understanding Security Deposit in Rent Agreement

When you’ve got a grasp on your rights as a tenant and comprehend the reasons and methods behind how a security deposit may be put to use, it can assist in establishing your entitlements when seeking a refund of the deposit from your landlord.

Security Deposit for Rent – Meaning

A security deposit, as the name intends, is an additional amount collected by the landlord as a surety for handling unforeseen circumstances that may arise while the renter uses the property. Understanding Security Deposit in Rent Agreement

It is usually collected before the renter moves into the property and held back until the rental agreement period. Understanding Security Deposit in Rent Agreement

This security deposit for rent must be refunded completely. Do remember that although a landlord must provide a refund, he/she can refuse to do so if the renter is found liable for damages to the premises taken on rent.Understanding Security Deposit in Rent Agreement

Why Security Deposit for Rent is Collected

Let’s say a renter moves into a property paying INR 15,000/month. The landlord lives in another city and doesn’t visit the rental premises in the twelve months the renter uses it.

At the end of the rental period, the landlord visits the house to see visible property damage. The living room tiles have cracks, and the bathroom faucets are damaged and broken, too.

Now, what actions does the landlord take upon learning that the damages were caused by the renter?

Since the renter has already left, they cannot be forced to take financial responsibility. 

In this case, the security deposit for rent that was collected will help. This money can be legally retained, depending on the extent of damage. 

How much should be the security deposit for rent?

For most cities in India, the security deposit cannot be more than 1-2 months of the monthly rental charges for residential properties. For non-residential/commercial spaces, the security deposit for rent can be a figure totalling the equivalent rent of 1-6 months. Understanding Security Deposit in Rent Agreement

Before entering into a Rental Agreement for which one has to shell out INR 20,000/month, the renter may be asked to pay the landlord INR 40,000 as a security deposit. Understanding Security Deposit in Rent Agreement

Nevertheless, this industry functions across various locales with limited regulatory scrutiny, granting landlords complete discretion when setting up a security deposit.Understanding Security Deposit in Rent Agreement

Security Deposit vs Advance Rent – What is the Difference

No. Security deposits for rent and rental advances are different concepts. Some landlords require rental money to be deposited before the start of the month. When you initiate the rental of the space, you might need to provide an initial payment equivalent to two months’ rent. This constitutes advance rent and will be applied as a credit towards the end of the lease period, with no possibility of a refund.Understanding Security Deposit in Rent Agreement

A tenant relocates to a new property with a monthly rent of INR 20,000. He/she signs the Rental Agreement with tenure for a year and agrees to pay an advance payment that is equal to a month’s rent. Accordingly, before the rental cycle for the first month starts, the renter remits INR 40,000. The renter does not need to pay the last month’s rent, as the advance paid will be adjusted. However, the landlord will have to refund any security deposit unless the renter damaged the rented premises during his/her stay in any way. Understanding Security Deposit in Rent Agreement

When can the Landlord Refuse Refund of Security Deposit 

Under normal circumstances, the security deposit for rent must be wholly refunded at the end of the lease tenure.

Nonetheless, should the tenant inflict any damage upon the property during his/her stay, the landlord maintains the prerogative to withhold either the entire security deposit or a portion thereof to offset the costs incurred in repairing the damages.

The security deposit cannot be used to handle general wear and tear, gradual structural damage, or maintenance issues like cleaning the drainage, whitewashing the exterior, electrical rewiring, or natural-disaster-caused damages to the building.

All these are the responsibility of the landlord and must be paid for from his/her own pocket. 

The security deposit money can only be used to address specific damages to the property caused by the renter, like stained walls, broken faucets or fixtures, or other intentional structural damage. 

Refund of Security Deposit in Rent Agreement – Sample Format

To ensure clarity, it is prudent to compose a thorough Rental Agreement that explicitly states the security deposit amount, defines precise rental and refund conditions, and offers a comprehensive explanation of when the security deposit might be utilised. Here is an illustrative rental agreement featuring a refund provision.

Security Deposit Trends in Top Cities of India 

The Model Tenancy Act (MTA) was approved in June 2021, but only four states have adopted it so far: Andhra Pradesh, Tamil Nadu, Uttar Pradesh, and Assam. State laws mostly govern security deposits, particularly in major cities.

• Delhi’s landlords demand a security deposit equivalent to 2 to 3 month’s rent, similar to the guidelines of the MTA.

• In Bangalore, landlords typically demand a security deposit equivalent to 6 to 10 months’ rent.

• Mumbai landlords require a security deposit of 3 to 6 months’ rent due to the expensive real estate in the city.

• When renting a property in Hyderabad or Chennai, the landlord may ask for a 3-6 months security deposit as per the terms or the specific location.

• Kolkata’s landlords are content with a security deposit of 2 to 3 months’ rent. 

Conclusion to Security Deposit & Refund Clause in Rent Agreement

Security deposit for rent has now become an unavoidable expense when you are trying to get a house for rent. As a potential renter, it is your responsibility to determine both the security deposit amount and the terms governing its retention.

MagicBricks offers easy rental agreement services that you can avail of to create a Rental Agreement with a detailed security deposit and refund clauses mentioned.