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Diff between sd and emd

neeraj (CA) (930 Points)

18 May 2012

What is the difference between Earnest money deposit and security deposit ?

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Rahul Sharma (----------) (8192 Points)
Replied 18 May 2012

Earnest Money vs Security Deposit

Earnest Money and Security Deposit are two terms that should be understood with difference. Earnest money is something which is close to pledging but is slightly different from it. Earnest money is paid on faith. Hence it is not as strong as pledge. In other words it can be said that earnest money is based on assurance whereas pledge is based on security.

Earnest money necessitates perfect understanding between the giver and the borrower. Security deposits are required mostly by lessors of apartments and commercial shops. This is in a bid to protect their apartments or commercial places against possible trickery on the part of the lessees. Many disputes and cases of litigation are seen in the case of the security deposits required by residential landlords.

Municipalities had thus come to the rescue of the landlords by allowing them to withhold the security deposits executed by tenants even after they have vacated the premises. In case of litigation the municipalities have allowed the tenants too to enjoy some interest on the security deposit from the landlords.

Earnest money is given on faith and there is no intention of business in it whereas security deposits are collected with business motives. This is one of the main differences between earnest money and security deposit. There is a ground of reliance in the case of security deposits whereas there is no ground of reliance in the case of earnest money. The lender will only exhibit faith on the receiver in the case of earnest money.

The party making advance payment in the case of security deposit has no right to insist upon the return of the money since he is bound by a contract. There is no such contract between parties in the case of earnest money which is grounded on assurance.