All about Escrow Account Operation under RERA

Introduction

The Real Estate (Regulation and Development) Act, 2016 (RERA) is a landmark legislation that has transformed the real estate sector in India. RERA has introduced a number of measures to protect the interests of homebuyers, including the requirement for developers to deposit 70% of the sale proceeds from each project into an escrow account.

An escrow account is a third-party account that holds funds on behalf of two or more parties until certain conditions are met. In the case of real estate transactions, the escrow account is typically held by a bank and holds the funds paid by homebuyers to a developer until the project is completed and the homebuyer is handed over possession of the unit.

The escrow account mechanism is designed to ensure that developers do not misuse the funds paid by homebuyers and that the projects are completed on time and within budget.

Operation of escrow accounts under RERA

The RERA Act has prescribed detailed guidelines for the operation of escrow accounts by developers. The key features of the escrow account mechanism under RERA are as follows:

• 70% of the sale proceeds must be deposited into the escrow account: Developers are required to deposit 70% of the sale proceeds from each project into an escrow account. The remaining 30% of the sale proceeds can be used by the developer to meet the project’s construction costs and other expenses.
• Escrow account must be held by a scheduled bank: The escrow account must be held by a scheduled bank in India. This ensures that the funds in the escrow account are safe and secure.
• Developer cannot withdraw money from the escrow account without the approval of the RERA authority: Developers cannot withdraw money from the escrow account without the approval of the RERA authority. This ensures that the funds in the escrow account are used only for the purposes intended.
• RERA authority to supervise the operation of escrow accounts: The RERA authority has the power to supervise the operation of escrow accounts and to take action against developers who misuse the funds in the escrow account.

Benefits of the escrow account mechanism under RERA

The escrow account mechanism under RERA offers a number of benefits to homebuyers, including:

• Protection against misuse of funds: The escrow account mechanism protects homebuyers from the misuse of funds by developers. By depositing a significant portion of the sale proceeds into an escrow account, developers are less likely to misuse the funds and are more likely to complete the project on time and within budget.
• Transparency and accountability: The escrow account mechanism ensures transparency and accountability in the use of funds by developers. The RERA authority has the power to supervise the operation of escrow accounts and to take action against developers who misuse the funds in the escrow account.
• Assurance of project completion: The escrow account mechanism provides homebuyers with the assurance that the project will be completed. This is because developers cannot withdraw money from the escrow account without the approval of the RERA authority, and the RERA authority will only approve the withdrawal of funds once the project is completed and the homebuyer is handed over possession of the unit.

Statewise RERA Compliance for Escrow Account

Each state RERA law has its own specific provisions regarding escrow accounts. Here is a summary of the salient features of some of the state RERA laws in regard to escrow accounts:

In addition to the above, all of the state RERA laws require developers to maintain separate books of accounts for each project. This is to ensure that the funds in the escrow account are used only for the purposes intended.

Conclusion

The escrow account mechanism under RERA is a significant step forward in the protection of homebuyers’ interests. By requiring developers to deposit a significant portion of the sale proceeds into an escrow account, RERA has made it more difficult for developers to misuse funds and has increased the likelihood of projects being completed on time and within budget.

Additional information

In addition to the benefits mentioned above, the escrow account mechanism under RERA also offers a number of other advantages, including:

• Reduced risk of project delays: The escrow account mechanism helps to reduce the risk of project delays. This is because developers are required to deposit a significant portion of the sale proceeds into the escrow account, which provides them with the financial resources needed to complete the project on time.
• Improved quality of construction: The escrow account mechanism also helps to improve the quality of construction. This is because developers are less likely to cut corners on construction costs when they know that they cannot withdraw money from the escrow account without the approval of the RERA authority.
• Increased confidence of homebuyers: The escrow account mechanism has increased the confidence of homebuyers in the real estate sector. This is because homebuyers know that their funds are safe and secure in the escrow account and that they will be protected from misuse by developers.

The escrow account mechanism under RERA is a powerful tool for protecting the interests of homebuyers. By understanding the operation of escrow accounts and the benefits they offer, homebuyers can make more informed decisions when purchasing a property.