Ultimate Guide to RERA Escrow Accounts: How 70% Rule Protects Homebuyers in India

Escrow accounts have become a cornerstone of secure financial transactions in India, particularly in the real estate sector. Since the implementation of RERA (Real Estate Regulation and Development Act) in 2017, escrow accounts have transformed how builders manage project funds, bringing much-needed transparency and accountability to an industry previously plagued by financial mismanagement. This article delves into the meaning, process, benefits, and regulatory framework governing escrow accounts in India.

What is an Escrow Account?

An escrow account is a secure financial arrangement where a neutral third party (the escrow agent) temporarily holds assets, funds, or important documents during a transaction between two parties. This arrangement serves as a protective measure until all predetermined conditions of the agreement are fulfilled.

In simple terms, an escrow account works as a secure vault that safeguards the interests of both buyers and sellers during a transaction. The funds remain locked in this account until both parties satisfy their contractual obligations, effectively eliminating trust issues that might otherwise hinder the transaction.

Escrow Accounts Under RERA Act, 2016

The implementation of the Real Estate (Regulation and Development) Act in 2016 made escrow accounts mandatory for real estate developers. According to Section 4(2)()(D) of the Act, developers must:

• Maintain a separate escrow account in a scheduled bank
• Deposit 70% of the amounts collected from homebuyers in this account
• Use these funds exclusively for construction costs and land costs of the specific project
• Withdraw funds only in proportion to the project's completion percentage
• Get the completion percentage certified by an engineer, architect, and chartered accountant

Additionally, the financial statements of the developer must be audited by a chartered accountant within six months of each financial year. This audit verifies that the collected funds have been utilized properly and withdrawals comply with the project's completion percentage.

How an Escrow Account Works in Real Estate

The operation of an escrow account in real estate follows a structured process:

1. Agreement Formation: The buyer and seller agree to open an escrow account and establish the terms in an escrow agreement.
2. Fund Deposit: After signing the agreement, the buyer deposits the payment in the escrow account. The escrow agent confirms receipt of these funds.
3. Monitoring: The escrow agent continuously monitors the account to ensure payments are made according to the agreement terms.
4. Fund Release: If both parties fulfill their obligations, the funds are released at the predetermined time.
5. Dispute Resolution: In case of disagreement, the escrow account enters dispute resolution. The outcome determines the fate of the funds held in escrow.

For RERA-regulated projects, builders must establish a principal account with two sub-accounts:

• A regular account holding 30% of funds, which developers can use at their discretion
• An escrow account holding the remaining 70%, strictly allocated for project construction

Developers must report quarterly to RERA, with all details uploaded online for buyers and investors to track project status and fund utilization.

Escrow Agreement Format

An effective escrow agreement must clearly outline:

• Parties involved: Names and addresses of the buyer, seller, and escrow agent
• Assets in escrow: Detailed description of the property or assets held in escrow
• Valuation: The monetary value of the assets or funds in escrow
• Conditions: Specific requirements that must be met before fund release
• Agent fees: Compensation for the escrow agent's services
• Dispute resolution: Procedures for addressing disagreements
• Timeline: Expected duration of the escrow arrangement
• Communication protocol: Methods for notifying the escrow agent about issues
• Default scenarios: Procedures for fund release if the transaction fails
• Condition verification disputes: Process for resolving disagreements about condition fulfillment

Types of Escrow Accounts in India

Escrow accounts serve various purposes across different sectors in India:

1. Real Estate Escrow: RERA mandates that 70% of customer funds be held in escrow to ensure proper project completion.
2. Home Loan Escrow: Banks and NBFCs use escrow to hold property tax and insurance payments, reducing loan default risks.
3. Mergers and Acquisitions Escrow: Facilitates trust between parties during corporate restructuring, ensuring smooth document and fund exchanges.
4. Freelancer Escrow: Online platforms act as escrow agents between companies and freelancers, protecting both parties until work is satisfactorily completed.
5. Rental Deposit Escrow: Ensures authenticity between landlords and tenants, guaranteeing secure handling of security deposits.
6. Auction Escrow: Banks serve as intermediaries between buyers and auctioneers during online auctions.
7. Software Trading Escrow: Protects source code while ensuring buyers receive exclusive usage rights, even if the developer ceases operations.
8. Cryptocurrency Escrow: Builds trust in cryptocurrency transactions by providing a secure intermediate holding point.
9. Share Issuance Escrow (SEBI-regulated): Companies must establish escrow accounts when offering shares publicly to ensure proper utilization of investor funds.
10. Online Platform Escrow (IT Rules-governed): Websites offering escrow services must maintain transaction records and handle disputes fairly.

Benefits of Escrow Accounts

Escrow accounts offer significant advantages, particularly in real estate transactions:

• Financial Protection: Both buyers and sellers enjoy security—buyers are assured of refunds if contracts fail, while sellers receive guaranteed payments upon successful completion.
• Simplified Financial Management: Property owners can manage insurance and tax payments through smaller monthly installments rather than large lump sums.
• Enhanced Transparency: All transactions are tracked and monitored, ensuring funds are used for their intended purpose.
• Reduced Risk: The involvement of a neutral third party minimizes fraud potential and protects all stakeholders.
• Regulatory Compliance: Following RERA guidelines through escrow accounts helps developers avoid legal complications.
• Timely Project Completion: With funds properly allocated, developers are incentivized to complete projects on schedule.
• Buyer Confidence: Knowing that investments are protected encourages more buyers to enter the market.
• Streamlined Dispute Resolution: The clear structure of escrow arrangements simplifies the resolution of conflicts between parties.

Conclusion

Escrow accounts have revolutionized financial transactions in Indian real estate by establishing a system of checks and balances. By mandating that 70% of project funds be secured in escrow accounts, RERA has created a framework that promotes project completion while safeguarding buyer investments. These accounts have become essential tools in real estate transactions, fostering transparency, accountability, and trust in an industry that previously struggled with these elements. As the real estate market continues to evolve, escrow accounts will remain fundamental to ensuring secure and reliable transactions for all parties involved.

Frequently Asked Questions

What percentage of funds must developers deposit in escrow accounts under RERA?
Developers must deposit 70% of funds collected from homebuyers in RERA-designated escrow accounts.

Can developers withdraw money from escrow accounts at will?
No, withdrawals must be proportional to the project's completion percentage and certified by professionals.

Who monitors the escrow accounts for real estate projects?
RERA authorities monitor these accounts through quarterly reports that developers must submit.

Are escrow accounts only used in real estate transactions?
No, escrow accounts are used across various sectors including mergers, freelancing, auctions, and share issuances.

What happens to money in an escrow account if a real estate project is abandoned?
The funds would typically be returned to the buyers as per the dispute resolution terms in the escrow agreement.

Can homebuyers check if a developer is maintaining a proper escrow account?
Yes, developers must upload escrow account details online through the RERA portal for buyers to access.

Is an escrow account the same as a regular bank account?
No, escrow accounts have specific regulations about fund withdrawal and usage, unlike regular bank accounts.

Who acts as an escrow agent in real estate transactions?
Typically, banks or financial institutions approved by RERA act as escrow agents in real estate transactions.