A security deposit in commercial contracting is a sum (or a bank guarantee) furnished by the supplier or contractor to the client to secure performance. Earnest money deposit (EMD) accompanies a tender and is refunded to unsuccessful bidders; performance security (typically 3% to 10% of the contract value, depending on the client's rules) is furnished by the successful bidder and refunded after completion and the defect liability period. The client may forfeit it only for the defaults the contract specifies, and wrongful forfeiture is recoverable with interest.
How security deposits work in India
Tender documents fix the EMD and the performance security percentage and form (cash, demand draft, fixed deposit receipt or bank guarantee). After award the performance security is furnished and the EMD returned or adjusted. During the contract the client may make recoveries against it for specified defaults. After completion and the defect period, the contractor applies for refund; the client checks for pending claims and releases it. Delays are usual because refunds rarely have an owner in the client's organisation. Public clients are generally bound by their own manuals (for example the General Financial Rules for central government) on timelines.
- Keep the deposit receipt, the award letter and the contract clauses on refund together.
- Apply for refund in writing with the completion and no-defect certificates.
- If the client forfeits, demand the reasons and the clause relied on in writing.
Why it matters for getting paid
Unreturned deposits are a debt like any other. The claim is for the deposit plus interest from the date it became refundable. Arbitrary forfeiture can be challenged in arbitration (most contracts) or court, and the Supreme Court has required clients to show actual loss in many forfeiture cases under Section 74. See retention money, bank guarantee and arbitration clause.
How FundRaksha uses it
FundRaksha's advocates fix the refund date from the contract and certificates, demand the deposit with interest, and challenge forfeitures that are not supported by the contract. Because many contracts have arbitration clauses, the notice is drafted to also invoke arbitration where needed. Fee: 30% of recovery; consultation free.
Worked example (hypothetical)
A Nagpur road-marking contractor furnishes a performance security of ₹6,00,000 (3% of a ₹2,00,00,000 contract) by fixed deposit receipt. Work is completed on 1 June 2025 and the 12-month defect period ends 1 June 2026, with no defects notified. The contract requires refund within 60 days, by 31 July 2026. Nothing is refunded by 31 January 2027. The contractor demands ₹6,00,000 plus interest under the contract at 12% for six months, ₹36,000, and reserves the right to arbitrate. The client releases the FDR with accrued bank interest within the notice period; the contractor accepts that in settlement.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.