What is an Escrow Account? Meaning, Definition & How It Works
An escrow account works differently from a normal savings or current account. Two parties in a deal, say a home buyer and a builder, agree that a neutral bank should hold the money instead of paying it over directly. The bank, called the escrow agent, releases funds only once the agreed conditions are met.
In India, escrow accounts are not just a private choice. They are a legal requirement across several sectors.
The Real Estate (Regulation and Development) Act, 2016 (RERA) mandates escrow accounts for registered builders, the Reserve Bank of India (RBI) requires them for payment aggregators and certain cross-border share deals, and the Securities and Exchange Board of India (SEBI) requires them for open offers in the stock market.
This regulatory backing is what makes an escrow arrangement more dependable than a private handshake deal.
Did You Know?
Under Section 4(2)(l)(D) of RERA, a registered builder must deposit at least 70% of everything a homebuyer pays into a project-specific escrow account, and can withdraw it only against certified construction progress. (Source: Razorpay)
How Does an Escrow Account Work?
An escrow account moves through a fixed sequence, regardless of whether it is backing a home purchase, a business sale, or an online payment.
- Agreement: both sides sign a contract naming a bank or licensed trustee as the escrow agent and spelling out the exact conditions for releasing money.
- Deposit: the buyer, investor, or homebuyer pays the agreed amount into the escrow account, not directly to the seller or builder.
- Verification: the bank checks whether the milestone, document, or certificate required by the agreement has genuinely been met.
- Release: once verified, the bank pays out the funds, sometimes in full and sometimes in parts tied to different milestones.
- Closure: after the final payment, the bank closes the account and shares a settlement statement with everyone involved.
Pro Tip
Before you sign an escrow agreement, read the release conditions line by line. A vague condition such as “on satisfactory progress” protects no one; insist on a specific, checkable milestone instead.
Example With Real Numbers
Imagine Ramesh, a 42-year-old software professional in Pune, books a 2BHK flat priced at ₹80,00,000 in a RERA-registered project.
Worked Example • Total agreement value: ₹80,00,000 • RERA escrow requirement: 70% of collections Calculation: ₹80,00,000 × 70% = ₹56,00,000 must go into the project’s escrow account. The builder can access the remaining ₹24,00,000 (30%) for other business needs, subject to RERA’s usual certification rules. |
This means every instalment Ramesh pays is split automatically. About ₹56 lakh of his money stays locked to construction and land costs for his specific project, and the builder can withdraw it only after an engineer, architect, and chartered accountant jointly certify the work done.
If the project stalls, this rule limits how much of Ramesh’s money could already have been diverted elsewhere.
Types of Escrow Accounts in India
Escrow accounts show up in several corners of Indian finance, each governed by a different regulator and a different rule of thumb for how much money sits in escrow.
Real Estate / RERA Escrow Account
This is the escrow account most Indian homebuyers encounter. Every RERA-registered project must open one with a scheduled bank, and the developer must deposit 70% of buyer payments there for construction and land costs. Withdrawals need certification from an engineer, architect, and chartered accountant.
Business / M&A Escrow Account
In mergers and acquisitions, buyers often hold back part of the purchase price in escrow to cover warranty claims or price adjustments discovered after the deal closes. SEBI’s Takeover Code also requires an escrow account when a company makes an open offer to public shareholders.
Cross-Border (FEMA) Share Escrow Account
When a non-resident buys or sells shares of an Indian company from a resident, FEMA’s Non-Debt Instruments Rules allow up to 25% of the price to sit in escrow as deferred consideration, usually for up to 18 months. NRIs and foreign investors structuring an India deal, including through GIFT City, often use this route.
Payment Aggregator Escrow Account
Since the RBI’s Payment Aggregators Directions, 2025, every payment aggregator must keep merchant and customer money in a dedicated escrow account with a scheduled commercial bank, separate from its own funds. This protects the money that briefly sits with the aggregator between your online payment and the seller’s payout.
| Type | Regulator | Typical Share / Duration |
| Real Estate (RERA) | RERA | 70% of buyer collections |
| Business / M&A | SEBI Takeover Code | Deal-specific, often 10–25% |
| FEMA Share Transfer | RBI / FEMA | Up to 25%, up to 18 months |
| Payment Aggregator | RBI | 100% of unsettled merchant funds |
Key Components of an Escrow Account
- Escrow Agent — the scheduled bank or licensed trustee that holds and administers the account. It cannot use the money for its own business.
- Depositor and Beneficiary — the depositor (buyer, investor, or aggregator) pays in; the beneficiary (seller, builder, or merchant) eventually receives the funds.
- Escrow Agreement — the contract that spells out deposit amounts, release conditions, timelines, and what happens if the deal falls through.
- Release Conditions or Milestones — specific, checkable triggers, such as a construction-stage certificate or a signed sale deed, that must be met before money moves.
- Duration and Closure Terms — how long the account stays open, and what happens to any balance once the deal is complete or cancelled.
Benefits of an Escrow Account
- Fraud protection — neither side can walk away with the other’s money mid-deal, since a regulated bank controls when funds move.
- Builder discipline — for Indian homebuyers, the RERA escrow rule ties a builder’s cash flow directly to construction progress, reducing the chance of a stalled project.
- Smoother cross-border deals — for NRIs and foreign investors, an escrow structure gives both sides confidence to close a FEMA-governed share transfer without upfront trust.
- Clear audit trail — every deposit and withdrawal is documented and certified, which helps resolve disputes or a regulatory review later.
Risks & Limitations
- Extra cost — escrow agreements carry setup and annual fees, plus legal drafting costs, on top of normal banking charges.
- Non-interest-bearing funds — most escrow accounts in India do not earn interest, so large sums can sit idle for months. Check the escrow agreement if you want this parked in a fixed deposit instead.
- Slower access to money — funds stay locked until conditions are certified, which can delay a seller’s or builder’s cash flow even when the underlying deal is genuine.
- Weak agreement drafting — a vaguely worded release condition can trigger disputes about whether the money should be released at all, so the wording of the agreement matters as much as the escrow account itself.
Important
Only use a scheduled bank or an RBI-recognised entity as your escrow agent. Informal “escrow” services offered by strangers on classifieds or social media are a common scam route, especially for online second-hand sales.
Frequently Asked Questions
What is an escrow account in simple words?
An escrow account is a bank account where a neutral bank holds money for two sides of a deal. It releases the money only after both sides meet the conditions they agreed on, so neither side has to trust the other directly.
How does an escrow account work when buying a house in India?
Your builder must be RERA-registered and must open a project escrow account with a scheduled bank. At least 70% of what you pay goes straight into that account, and the builder can withdraw it only against certified construction progress.
Is an escrow account the same as a normal current account?
No. A current account is fully controlled by its owner. An escrow account is controlled by an independent agent, the bank, under the terms of a signed agreement between two other parties.
Does an escrow account earn interest in India?
Most escrow accounts are non-interest-bearing current accounts. Some agreements allow the balance to be parked in an interest-bearing fixed deposit instead, but this depends entirely on what the escrow agreement says.
What documents are needed to open an escrow account?
Banks typically ask for the signed escrow agreement, KYC and address proof for all parties, and, for cross-border or M&A deals, board resolutions and any regulatory approvals that apply.
What are the charges for an escrow account?
Charges vary by bank and deal size. As one reference point, SBI lists escrow agreement charges of ₹25,000 plus GST at account opening and ₹10,000 plus GST every year for non-loan escrow accounts. (Source: SBI) Always confirm current charges with your own bank before opening one.
Is escrow only used in real estate?
No. Beyond RERA projects, escrow accounts are used in M&A deals, IPOs and open offers, FEMA-governed cross-border share transfers, and, since 2025, by payment aggregators holding merchant funds.
When should I consider using an escrow account for my own transaction?
Consider one whenever you are paying a large sum upfront without an established relationship of trust, such as a private property deal, a business sale, or a large freelance project, where a lawyer or bank can help you set the right release conditions.