Security deposits have long been a major hurdle, especially in cities like Mumbai and Bangalore, where they once amounted to up to 10 months’ rent. Under the new tenancy rules, deposits have been limited to two months, making renting much easier. Want to understand security deposit and refund clauses?
The security deposit is meant to protect the landlord’s interests, yet many tenants aren’t sure how it’s determined and what happens to it after the lease ends. Questions about deductions, timelines, and refunds are common but often unclear. This article explains the basics of security deposits and refund clauses, so you know what to expect during move-in and move-out.
Security Deposit for Rent – Meaning
As the name suggests, a deposit is an additional amount of money that a landlord collects as security to cover any unexpected problems that may arise while the tenant is using the property.
It is typically collected before the tenant moves into the property and is held for the duration of the rental agreement.
This deposit must be fully refunded upon rent. Remember that although the landlord is required to provide a refund, they may refuse to do so if the tenant is found responsible for damage to the rented space.
Why Security Deposit for Rent Collected
Let’s say a tenant moves into a property for INR 15,000/month. The landlord lives in another city and doesn’t visit the property for twelve months, while the tenant uses the rental space.
When the rental period ends, the landlord returns home and finds obvious damage to the property. The living room tiles are cracked, and the bathroom faucets are worn and broken.
How much should be the security deposit for rent?
In most cities in India, the security deposit cannot exceed 1-2 months’ rent for a residential property. For non-residential/commercial spaces, the security deposit can be equivalent to 1-6 months’ rent.
Before entering into a rental agreement, which requires a monthly payment of INR 20,000, the tenant may be asked to provide the landlord with a deposit of up to INR 40,000.
However, this industry operates with less regulatory scrutiny in different locations, giving landlords considerable latitude when setting security deposits.
Now, what actions does the landlord take upon learning that the damages were caused by the renter?
Since the tenant has already moved out, they cannot be forced to take responsibility for the money.
In this case, the deposit paid for the rent may be helpful. Depending on the extent of the damage, this money may be legally retained.
Security deposits vs advance rent payments
Although both amounts are paid up front, they have different meanings. A security deposit is a refundable amount held to cover damages or outstanding payments. Advance rent is a non-refundable amount covering future rent, typically used to confirm a booking or as the first or last month’s rent.
For example, suppose Maya enters into a new rental agreement with a monthly rent of ₹10,000. The landlord asks for a monthly rent, a one-month security deposit, and a one-month advance.
The table below shows the total upfront expenses Maya will have to pay when entering into this new rental agreement:
| Total amount paid by Maya | |
| 1st month’s rent as per agreement | Rs 10,000 |
| Advance rent to be adjusted on the last month of the agreement | Rs 10,000 |
| Security deposit (with or without deduction) to be refunded at the end of the tenure | Rs 10,000 |
| Total amount paid upfront | (10,000 + 10,000 + 10,000 ) = Rs 30,000 |
When Can the Landlord Refuse a Refund of the Security Deposit
Generally, security deposits for rentals must be fully refunded at the end of the lease term.
However, if the tenant causes any damage to the property during their stay, the landlord has the right to withhold all or part of the security deposit to cover the cost of repairing the damage.
The security deposit cannot be used to cover general wear and tear, gradual structural damage, or maintenance matters such as drain cleaning, exterior whitewashing, electrical rewiring, or natural disaster damage to the building.
All of this is the landlord’s responsibility and must be paid for.
Security deposit money can only be used to repair specific damage to the property caused by the tenant, such as stains on walls, broken faucets or fixtures, or other intentional structural damage.
Security deposit laws under the Model Tenancy Act
The Model Tenancy Act was approved by the Union Cabinet on June 2, 2021, subject to adoption by the respective state or union territory. It offers several models that balance the rights and interests of landlords and tenants in relation to residential and commercial properties in urban and rural areas. These include:
- The Act requires the tenant and landlord to sign a rental agreement that details all terms and conditions agreed upon between the parties.
- The landlord is responsible for whitewashing walls, painting doors and windows, and repairing any other structural damage to the property.
- The tenant is responsible for daily cleaning, repairing switches and sockets, repairing kitchen appliances, replacing glass panels in windows and doors, etc.
- The security deposit cannot exceed two months’ rent for residential properties, and six months’ rent for non-residential properties.
- The landlord is entitled to deduct any outstanding rent or damages (other than normal wear and tear) from the security deposit before refunding the remaining amount upon vacating the property.
- If a tenant does not vacate the house after the tenancy expires, the landlord can demand double the monthly rent for the first two months and quadruple the rent thereafter, provided the landlord has fulfilled all contractual obligations.
- To avoid any disputes, all terms and conditions should be clearly spelled out in the agreement. In case of a dispute, the aggrieved party can approach the state rent control tribunal or civil court.
Is a security deposit refundable?
The security deposit is refundable, but the amount returned depends on the property’s condition and whether any dues are pending at the time of vacating. This deposit is intended to protect the landlord from any losses beyond normal wear and tear or outstanding rent. When the tenancy ends, and the landlord takes back possession, the landlord calculates the refundable amount after making any legal deductions.
To avoid confusion, every rental agreement includes a clause outlining how this refund should be handled. This brings us to the refund clause.
What is the refund clause?
The refund clause in a rental agreement specifies how and when the security deposit will be returned to the tenant after the tenancy ends. It outlines the repayment timeline, deduction requirements, and the responsibilities of both the landlord and tenant.
Here are the refund clauses stated in the Model Tenancy Act:
- According to the law, the landlord can return the security deposit to the tenant after deducting the cost of any outstanding dues or major repairs.
- Tenants cannot claim a security deposit refund upon rental agreement renewal. Refunds are only made when the tenant vacates the premises after the expiry of the rental agreement.
- The security deposit must be returned on the date of taking possession of the vacant property or within 15-30 days.
- If the landlord fails to return the security deposit on time, they may be required to pay interest to the tenant, subject to applicable state regulations.
Dos and Don’ts of a Rent Agreement for a Security Deposit?
Sometimes, the security deposit is commonly called a caution deposit or caution money. Therefore, to protect the rights of tenants, the rental agreement should clearly state the terms negotiated between the two parties.:-
Here are dos and don’ts that you need to keep in mind while drafting a rent agreement:-
- The rental agreement should clearly state the following: monthly rent, security deposit, return date, rent period, and the possibility of rent changes after the agreed period.
- Be sure to mention any restrictions in the rental agreement, such as no drilling on the roof, no use of the roof, etc.
- Be sure to also state when deductions will be made from the security deposit.
- Clearly state the terms, discounts, and penalties for subletting.
- All parties should sign the rental agreement, even if it is on a shared basis, and all tenants should carefully read the terms before signing.
- It is important to mention the lock-in period in the rental agreement.
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