This guide helps you understand the purpose of security deposits and how the refund process works in rental agreements.
Everything You Need to Know About Security Deposits in India
While renting a property, one of the first financial commitments you’ll come across is the security deposit. In addition to monthly rent, tenants are required to put down a lump sum amount before moving in. This amount acts as financial security for the property owner in case of unexpected damage or unpaid dues.
In this blog, we will explain the meaning and purpose of security deposits and how the refund process works.
What is a Security Deposit?
A security deposit is a one-time upfront payment made in advance by a tenant to the landlord of the rented property. It is typically equal to one or two months' rent and acts as insurance for the landlord.
As the name suggests, a security deposit protects the landlord’s property or rental income in case of unforeseen circumstances. The landlord holds this money for the duration of the tenancy and refunds it at the end of the rental period, provided the terms of the agreement are fulfilled.
For example, if a tenant pays ₹20,000 in monthly rent, the security deposit may be ₹20,000 or ₹40,000, depending on the policy of the region. Now, say, before leaving, the tenant causes some damage to the property. The landlord can then use the security deposit to cover the costs of repairs or replacements.
What is the Purpose of a Security Deposit?
The security deposit acts as a safety net for landlords. By holding a deposit, landlords are protected against various potential risks during the rental period. Below are some key purposes a security deposit serves:
Protection against property damage: The security deposit ensures that landlords have funds available to cover any damage caused by the tenant beyond normal wear and tear (e.g., broken windows, damaged walls, or any unauthorised modifications).
Coverage for unpaid rent: If a tenant fails to pay rent, the landlord can use the security deposit to recover lost income.
Compensation for breach of contract: If the tenant breaks the lease early or fails to fulfil any terms of the agreement, the security deposit can be used to cover any resulting losses or legal fees.
Peace of mind: A security deposit gives landlords confidence that their property will be taken care of and returned in good condition.
Encourages tenant responsibility: It also encourages tenants to take care of the rental property and meet their obligations, as they know that their deposit is at stake.
TL;DR A security deposit ensures landlords have a financial buffer to address any issues that may arise without immediately seeking legal action or other remedies.
What are the Factors Influencing the Security Deposit Amount?
Some of the major factors determining the security deposit amount include:
State Laws and Regulations: Some state regulations in India place a limit on how much security deposit can be charged, while others may have limited oversight.
Property Amenities: If the rental property comes with better amenities like security, private parking, or modern furnishings, the landlord could charge a higher security deposit.
Local Market Conditions: The demand for rental properties in the area plays a big role. In high-demand markets with limited availability, landlords often ask for higher deposits. Many landlords also align with what others in the region are charging.
How Much Should the Security Deposit Be for Rent?
The security deposit amount is usually based on the monthly rent. For most residential properties in India, it’s equivalent to one or two months' rent.
However, the rental industry in India is governed by several local laws, and there is limited regulatory oversight. This means that in less organised rental markets, landlords may have more flexibility in setting deposit amounts. This can result in varying practices across different regions.
What Are the Security Deposit Trends in Major Indian Cities?
The security deposit amount in India varies from state to state, and in major cities, it tends to be significantly higher due to several factors:
In major cities, landlords factor in the cost of living, the type of property, and the locality while deciding the amount. The higher the property’s value, the higher the lease—and, consequently, the security deposit. For example, in Bengaluru, it is not uncommon for landlords to ask for up to 6-10 months’ rent as a security deposit.
The amount is heavily influenced by demand and supply economics. If there is a lot of demand for rental properties and limited availability, landlords can ask for higher deposits.
Another factor is the income levels in the city. In bigger cosmopolitan cities, where monthly earnings are generally higher, rents will be higher as well. Since the security deposit is calculated based on the rent, it will also be higher.
City-Specific Security Deposit Trends
While we've discussed general factors influencing security deposits, let's look at specific trends in major Indian cities:
Disclaimer: The security deposit range mentioned in the table is just an estimate and may differ depending on factors such as location, type of property, and the landlord's policies.
What Does the Model Tenancy Act Say About Security Deposits?
In India, matters related to tenancy and property leasing usually fall under the jurisdiction of state governments. However, to bring more transparency and fairness to the rental market, the government introduced the Model Tenancy Act 2021.
This act aimed to streamline rental practices across the country and protect both landlords and tenants from potential disputes and unfair practices. The Union Cabinet approved it in June 2021.
Here are two of the aspects the act regulates with regard to security deposit:
1. Security Deposits
The Model Tenancy Act provides clear guidelines on how much security deposit can be charged:
For residential properties: The security deposit should not exceed two months' rent.
For non-residential (commercial) properties: The security deposit should not exceed six months' rent.
2. Property Maintenance Responsibility
The act also clarifies the responsibilities of both landlords and tenants in maintaining the property:
Shared Maintenance: Both the landlord and tenant must keep the property in good condition throughout the tenancy, except for normal wear and tear.
Tenant’s Responsibilities: If a tenant refuses or fails to carry out any agreed-upon repairs, the landlord can make those repairs and deduct the costs from the security deposit.
Uninhabitable Premises: If the property becomes uninhabitable due to major repairs or natural disasters, the tenant doesn't have to pay rent until it's restored. If the repairs are not done, the landlord must refund the security deposit and any advance rent within 15 days.
The act strives to strike a balance between protecting the rights of both landlords and tenants.
Note: The Model Tenancy Act 2021 is under review by the states and union territories. So far, only four states—Tamil Nadu, Andhra Pradesh, Uttar Pradesh, and Assam—have revised their tenancy laws in line with the Act.
What is the Difference Between Security Deposit and Advance Rent?
A security deposit and advance rent may seem similar, but they serve different purposes in a rental agreement.
A Security Deposit is a refundable amount that the tenant pays at the start of the lease. If everything is in good condition and all payments are made, the security deposit is returned at the end of the tenancy period.
Unlike the security deposit, advance rent is non-refundable. It's an upfront payment made to cover the rent for the first few months, usually one to three months. This amount is adjusted against the rent for the specified period and is not returned.
How Is a Security Deposit Refunded?
Disputes related to returning security deposits are very common in rental agreements, which is why it's important to understand the rules and responsibilities surrounding it.
According to the Model Tenancy Act, the security deposit must be refunded to the tenant when they vacate the property after making any necessary deductions. Ideally, the landlord should fully refund the security deposit at the end of the lease term. However, sometimes the landlords can make certain deductions.
Here are some key points regarding deductions:
Allowable Deductions
Repair costs for damages caused by the tenant, such as drilled holes in walls, broken windows, or damage due to neglect.
Any outstanding rent or utility bills.
Any adjustments or improvements made by the tenant without the landlord’s permission.
If the tenant doesn’t leave the property clean or as it was when they moved in.
Non-Allowable Deductions
Routine wear and tear, such as peeling paint or worn-out hinges.
Costs incurred to repair damage caused by natural disasters or gradual structural wear over time.
Costs related to general maintenance, such as whitewashing or external electrical work.
If significant damage is caused by the tenant, the landlord has the right to withhold the entire security deposit or part of it to cover repair costs.
Importance of a Strong Rental Agreement
Drawing up a solid rental agreement before the tenant moves in can help avoid disputes. This agreement should include:
The responsibilities of both the landlord and the tenant regarding property upkeep, maintenance, and repairs.
The security deposit amount.
Terms for the return of the security deposit, including any potential deductions.
The rental agreement should be reviewed carefully, signed by both parties, and registered at the sub-registrar office to be legally binding.
This ensures both the landlord and tenant understand their rights and responsibilities, reducing the chances of disputes when it comes to the return of the security deposit.
What Can Tenants Do if the Security Deposit Is Not Returned?
If tenants believe their security deposit is being unfairly withheld, there are several steps they can take:
Communicate with the Landlord: Start by discussing the issue with the landlord and request a detailed explanation for any deductions.
Send a Legal Notice: If communication doesn’t resolve the issue, tenants can send a legal notice.
Approach the Rent Control Board: File a complaint with the local rent control authority if the issue persists.
Take Legal Action: As a last resort, tenants can file a civil suit in court to recover the deposit.
Often, open communication and mediation can help resolve the issue without the need for legal action.
Best Practices for Managing Security Deposits for Landlords
Research the common security deposit amounts in your area to stay competitive and fair.
Keep communication with your tenant clear and open to prevent misunderstandings about the deposit.
Make sure the security deposit is clearly mentioned in the rental agreement to avoid any confusion later.
Keep the deposit amount reasonable to attract good tenants.
Crib: A Smarter Way to Manage Rental Finances
Crib offers efficient rental agreement services, allowing you to create fully digital agreements with clear terms for security deposits, refunds, and other charges.
Crib also simplifies property management by enabling payments to one or multiple bank accounts. It offers instant settlements, meaning funds are quickly available to landlords. Additionally, the system automates the reconciliation process, significantly reducing the time and effort typically required for bookkeeping.
Conclusion
Understanding the rules and regulations around security deposits can help both landlords and tenants avoid disputes when it's time to move out. Clear communication, proper documentation, and following legal provisions are key to ensuring a smooth rental experience.
Landlords should ensure that all terms are clearly outlined in the rental agreement, while tenants should take responsibility for the property during their stay to avoid unnecessary deductions. In case of a disagreement, it’s always best to seek professional legal advice to resolve the matter fairly.
Frequently Asked Questions
1. Is it mandatory to pay the security deposit in addition to the rent?
Yes, a security deposit must be paid in addition to the monthly rent. This amount safeguards the landlord against potential damages and unpaid rent.
2. How much can the maximum security deposit be?
The maximum security deposit varies depending on the location and type of property. For residential properties, it is generally two months' rent, while for commercial properties, it can be up to six months' rent, as outlined by the Model Tenancy Act. In some cities, landlords may ask for more depending on the local rental market.
