Homebuyers in India are still struggling with delays, financial uncertainty and abandoned construction. Under the Real Estate (Regulation and Development) Act, 2016 (RERA), the Real Estate Regulatory Authority (RERA) tightened regulations and made it compulsory for developers to use escrow accounts.
Escrow is a process that describes an agreement between the developer and the buyer regarding a financial arrangement. In this agreement, the money invested is held by a neutral third party on behalf of the property buyer, as per Sanjeev Arora, Director, 360 Realtors. An escrow account is monitored by an escrow operator.
The agent would deliver the property or the money only when the conditions of the contract were satisfied (or a relevant order was issued). Besides real estate, it is also applicable in securities, funds and other assets.
A Safety Net for Big-Ticket Transactions
Purchasing or renting a property in India is a high-stakes financial event, and you will want to have it as a safe and secure transaction. The whole idea of having “escrow accounts” is that funds are put in trust and not spent until all contractual obligations are satisfied.” In real estate, it means that developers only get the money once they have completed the construction milestones they have negotiated.
Advertisement
What is Escrow in Real Estate?
An agreement involving money and contracts. Escrow is when a third party holds an asset, like cash, a check or stock, on behalf of two other parties as they complete a transaction, according to a common definition widely used in legal and financial circles.
The use of escrow accounts in construction also prevents the misuse of funds. Developers disburse payments to contractors only after certified completion of specific project stages. This system keeps project spending aligned with progress, adding a layer of transparency that was previously lacking.
RERA’s Regulatory Muscle
To address rampant fund mismanagement in the sector, the Indian government made escrow accounts mandatory under RERA. The law stipulates that developers must deposit 70 per cent of funds received from buyers into an escrow account maintained with a scheduled bank. This account can be used strictly to cover land and construction costs related to the same project.
Advertisement
Section 4(2)(l)(D) of the RERA Act requires developers to submit a sworn declaration confirming compliance. Withdrawals from the escrow account are permitted only after validation by an engineer, an architect, and a practising chartered accountant proportionate to the stage of project completion.
Additionally, annual audits are compulsory. A practising CA must verify that all funds have been used as intended. These audits must be completed within six months of the financial year’s end, ensuring consistent oversight.
