Escrow Account In India: Examples, Benefits & How to Open

What is an Escrow Account? Meaning & Definition

An escrow account is a temporary secure account where a third party (usually an escrow agent account) holds funds or assets of the two parties. These funds are only released when the agreed conditions are fulfilled. Escrow account acts as a safety net for high-value transactions, usually used in the case of real estate or online sales. An escrow account in India helps to prevent fraud and is helpful for people who deal mainly in collecting and paying property payments.

Why Do You Need An Escrow Account In India?

You may need an escrow account in case of:

A large transaction (between two or more parties)

• • that have some legal obligations attached to them

• • which need to be fulfilled before the release of the payment or an asset.

Here’s an example:

Let’s say you are a construction builder and aim to sell apartments. Now, let’s assume that you aim to get these apartments booked by customers before they are ready to move in. 

Naturally, there are transaction risks- 

The customer may not want to pay the full amount before possession

• • There is a risk of scams (money being redirected to other avenues)

• • Customers may be wary if pre-determined conditions are not fulfilled

(Here’s an example of a predetermined condition. As a construction builder, you might have promised free home appliances at the time of house possession.)

Here’s where an escrow account in India steps in.

It reduces the risk of fraud as it acts as the third party between the two parties. Moreover, it helps control the cash flow between the two parties. 

Additionally, since September 2022, escrow accounts have become indispensable for co-lending use cases. 

According to the digital lending guidelines by RBI, all loan repayment and disbursement must be done directly between the bank account of the lender and borrower. This means that no third party pass-through account can be used by banks, NBFCs or lending service providers (LSPs).

However, co-lending use cases are an exception to this rule. 
In other terms, co-lending players (like banks and NBFCs) can use escrow accounts to pool funds before disbursing to borrowers.

Related Read: How to Kickstart Your Co-Lending Journey?

How To Open An Escrow Account In India?

Here’s the escrow account opening procedure in India:

The process of an escrow account is very straightforward. Every online transaction carries risk for both buyer and seller. To mitigate the risk, the government has mandated that high-value transactions be processed through an escrow account. 

1. Agreement: The buyer, seller, and the third-party agent (i.e, the escrow agent) all come together to discuss the terms and conditions under which the funds would be released. 
2. Deposit: Once agreed, the buyer deposits the payment as per the agreement into the escrow account. 
3. Retention Duration: During this time, the funds are securely held with the escrow agent, who holds the funds till the time of final payment.
4. Condition Fulfilment: Both parties work on fulfilling the terms and conditions created, such as completing and submitting the documents, arranging the finances, or delivering the consignment as promised. 
5. Checking and verifying: Once the escrow agent confirms that the buyer and seller have adhered to all terms and conditions, the agent prepares to release the funds. 
6. Payout: As agreed upon, once all terms and conditions are met, the escrow agent disburses the funds or assets to the buyer

Cashfree escrow account understands the importance of the buyer’s funds and ensures to protect the funds till all terms and conditions are met by both the buyer and the seller.

Escrow Account Charges in India

The charges for an escrow account vary based on the bank or financial institution. The fees typically depend on factors such as:

• Duration of the account: The longer the escrow account is maintained, the higher the charges.

• Transaction value: Larger transactions may incur higher fees.

• Service charges: Banks typically charge for administrative tasks like monitoring and transferring funds.

For instance, some banks might charge 0.5% to 2% of the total transaction amount. Always verify the charges with your bank before opening an escrow account.

Examples of Escrow Accounts in India

Let’s have a look at some of the examples of an escrow account in India.

Escrow Accounts For Real Estate

This is an industry most associated with the term ‘escrow account’.

After all, buying or leasing a property is a massive transaction that requires trust. The seller needs to assure the buyer that they will get possession without hassle. On the other hand, the buyer needs to assure of timely payment.

In recent times, many developers have defaulted on their promises.

To ensure regulation of the real estate industry, the Government of India made escrow accounts mandatory for real estate transactions. In fact, the Real Estate (Regulation and Development) Act, of 2016¹ require real estate builders to keep 70% of the customer funds in an escrow account.

Therefore, this is quite a ‘win-win’ situation for both parties.

• • The buyer can assure the seller that they have the necessary funds

• • The seller can assure the buyer that they are using the fund only for the desired purpose: the construction of said real estate

Co-Lending NBFC and Fintech Players

NBFCs, fintechs and other LSPs can use these accounts to pool their funds before disbursement to customers. 

Let’s take the example of two NBFCs titled A and B that have a co-lending partnership. Here, the borrower ‘Jane Doe’ applies for a loan of Rs. 10 Lakhs. 

NBFC ‘A’ might lend 80% of the funds and NBFC ‘B’ lends the remaining 20%. 

This is where they require a pass-through account (aka an escrow account) wherein they can pool the funds before disbursing to Jane Doe.

Mergers And Acquisitions

Let’s say that Company A acquires Company B.

Now, there are a lot of aspects in takeover proceedings. Company B might have to transfer:

• • All the assets

• • Company resources (even employees)

• • Paperwork and required documents

Evidently, the takeover will not be complete if Company B does not finalize the handover. Moreover, the company may facilitate the asset transfer in batches over time.

In such a situation, an escrow account in India helps reassure both parties. It maintains trust between the players and ensures that both parties hold up their part of the deal.

Once the stakeholders (or the governments) approve the merger, the exchange of the cash and documents occurs with escrow accounts.

Rental Deposit

Rental deposits are another use case. More often than not, landlords require a security deposit. Once the tenant vacates the rental property, the landlord has to return the deposit.

An escrow account assures the buyer of the safety of their security deposit. Moreover, it assures the landlord that they are dealing with verified parties. 

Here is how the process goes:

1. The landlord and tenant agree on the terms required for the account.

2. The tenant transfers the security deposit.

3. The agreement might permit partial withdrawal of the security deposit as per the conditions.

4. The landlord transfers the deposit back to the buyer once they stop the property possession.

Auctions

Some people participate in online auctions to buy assets through banks. These banks serve as escrow accounts between the auction and the buyer.

Software

Using an escrow account for your software keeps the source code confidential. 

When someone buys your software through an escrow account, it gives you the right price and keeps your source code secure. 

On the other side, the buyer gets exclusive user rights, and it assures to provide the required source code even if the developer stops working.

Freelancers

Many major websites act as escrow accounts between the freelancer and the employer.

The websites help freelancers work with an employer without losing money. If the freelancer’s work is satisfactory, the website transfers the money to the freelancer.

Cryptocurrencies

Bitcoins or cryptocurrencies are the latest market trends. 

Many people hesitate to invest in this as it is still not legal in many countries. In such cases, the transactors provide an escrow account to the buyer due to the trust issues revolving around the same. 

Every transaction which involves buying and selling can make use of escrow services.

Given below are some additional examples that require an escrow account in India.

• Conservation of assets
• Capital Fundraising
• Fundraising for charities
• Gambling/betting
• Legal agreements
• Stock market trading
• Asset transactions
• Valuable private trades
• Government-backed loans
• Insurance payments 

Escrow Account In India Vs Nodal Account

Now that we have covered examples of an escrow account in India, it’s time to move on to something equally important.

What is the difference between an escrow account and a nodal account?

Before we move on to concrete differences between the two, let’s have a look at the definition of a nodal account.

A nodal account is a very specific type of bank account mandated by RBI. Businesses that act as an intermediary between buyers and sellers use nodal accounts in India.

They aid in building trust between buyers, sellers and the payment system. 

Essentially, a business or payment aggregator may use a nodal account to:

• • Collect money on behalf of vendors

• • Source products without manufacturing them 

Essentially, the business has no role in creating or maintaining inventory.

Now, let’s move on to the differences between an escrow account in India and a nodal account. 

Who Uses These Accounts?

Virtually anyone can use an escrow account in India. As we saw in the preceding examples, banks, corporations, or real estate owners can use it for their purposes. Essentially, buyers and sellers transferring a sizeable asset have to use these accounts. 

On the other hand, only intermediaries use nodal accounts in India. Basically, these are businesses that connect the buyer and seller. For example, a payment system helps a merchant accept payments. 

Online marketplaces (like Amazon), PPI (pre-paid instrument) and payment aggregators (PAs) use a nodal account for their respective use cases.

Some features of a nodal account are:

• • Strict adherence to RBI norms for marketplaces

• • Protecting customer and merchant interest

• • Safe collection of payment for merchants by customers

• • Settlements within the defined timeline

Do Buyer And Seller Know Each Other?

More often than not, the two parties may not know each other in an escrow account deal. Instead, the escrow agent facilitates the transaction.

However, in the case of a nodal account, payments are transferred to the account maintained by the payment aggregator.

Thereafter, it disburses the payment to the correct recipient on settlement. 

What Is The Purpose Of The Account?

In an escrow account in India, the buyer makes the payment. However, the buyer keeps the payment on hold until all the conditions of the pre-decided agreement are fulfilled. Thereafter, they transfer the funds to the seller. 

In the case of a nodal account, the payment aggregator collects the payment on behalf of the merchant. Then, they keep the funds on hold until the time of the settlement. This ensures that this intermediary does not have access to the funds. 

Hence, this ensures the safety of payment.

Advantages Of Having An Escrow Account

Security 

The buyer and seller will have protection for both their funds and the goods as the funds are neutral with the third party agent.

Automation

These accounts are fully automated. This means that the funds are automatically transferred to the seller once all the clauses in the agreement have been fulfilled. 

Being Compliant with RBI Guidelines

As mentioned above, co-lending players require an escrow account to stay compliant with the latest RBI guidelines on digital lending.

Facilitates Agreement

The escrow agent acts as the middle person during the agreement process between the two parties and ensures that both parties come to an agreement. 

Simple And Efficient

Opening this account is a very simple and quick step. An escrow agent helps both parties to have an efficient and smooth transaction during the tenure.

Confidentiality

The details of the escrow account holder’s names are maintained confidential and are not public.

However, parties can use these accounts depending upon both of their individual interests. Some multinational companies and government agencies do make it a strict rule to have an escrow account, while others have the freedom to avail of the services as per their liking.

Guidelines Set by Authorities around Escrow Accounts in India

1. Reserve Bank of India (RBI) – Banking and Payments Regulator

The Reserve Bank of India (RBI) is India’s central bank and one of the primary regulators of escrow accounts, especially when escrow is used for payments, foreign investments, or digital money flows.

Key Rules by RBI

• Allowed Purpose: Escrow accounts must be used only for legitimate, specified transactions — for example, holding customer funds collected through payment platforms or holding funds for foreign investment deals.
  
• Where They Can Be Opened: Escrow accounts must be opened with a Scheduled Commercial Bank (SCB) in India.
  
• Segregation of Funds: Money collected on behalf of customers (such as on payment aggregator platforms) must be maintained separately in an escrow account and not mixed with the business’s own funds.
  
• Permissible Transactions: RBI specifies in the escrow account guidelines about what can be credited and debited. For example, customer payments can be credited, and payouts to merchants or refunds can be debited, following a clear schedule and adjustments set between the buyer and seller.
  
• Escrow in Foreign Investments: Under the Foreign Exchange Management (Deposit) Regulations, escrow accounts used for cross-border share acquisitions must follow strict conditions, for example, funds can be credited only by permitted remittances, and the account is usually non-interest-bearing and must close after the purpose is fulfilled.
• Escrow Duration Limits: For certain foreign direct investment (FDI) deals, RBI rules state that the escrow account typically can only remain open for 6 months unless specific permission is given.
• KYC Compliance: As per the rules of RBI, it states that the Know-Your-Customer (KYC) checks are mandatory for banks and the escrow agents along with the buyer and sellers.   Without these, no one is authorized to open or operate the escrow account

In essence, RBI’s guidelines are designed to ensure that escrow accounts are safe, transparent, and used exactly for the purposes permitted by law.

2. Securities and Exchange Board of India (SEBI) – Capital Markets Regulator

When escrow accounts are used in capital market transactions — such as open offers, takeovers, mergers and acquisitions, initial public offerings (IPOs), or share transfers — SEBI regulates them.

SEBI’s Escrow Rules

• Mandatory Deposit for Offers: In a takeover or public offer, the acquiring company must deposit a certain percentage of the offer value into a SEBI-specified escrow account before making the offer public.
• Form of Escrow: The escrow can be in the form of cash, bank guarantees, or approved securities, as permitted under SEBI regulations.
• Empowering Merchant Banker: SEBI requires the financial intermediary managing the offer to instruct the bank to make payments, issue demand drafts, or process withdrawals. 
• Validity and Security: As per the SEBI guidelines, the bank guarantees must remain valid throughout the terms and conditions period and even after the offer completion for a specific time frame.
• Increase in Escrow for Revised Offers: If an offer price is increased, SEBI mandates increasing the escrow amount accordingly. 
• Forfeiture: If the buyer fails to fulfil its contractual responsibilities, SEBI may forfeit the escrow amount. 

Every rule established by SEBI guarantees the safety of investors and owners as well as the safekeeping of funds prior to the fulfillment of obligations in significant securities transactions.

3. Real Estate (Regulation and Development) Act – RERA

The rules under the Real Estate (Regulation and Development) Act, 2016 (RERA), are designed to safeguard buyers and sellers and ensure the final deal is secure through a legal escrow agent. 

RERA Escrow Account Rules

• Deposit of Buyer Funds: To secure the buyer’s funds, the RERA Act requires the construction company to set aside 70% of the funds collected into the respective escrow account. 
• Purpose Limitation: The funds in the escrow account should only be used for the same purpose for which they are deposited. It means that if the buyer is submitting the funds for construction purposes, then it can only be used for the construction of that project. 
• Proportional Withdrawals: Builders who received funds from the buyer may withdraw only in proportion. The withdrawal permission must be approved by professional engineers, building planners, and chartered accountants.
• Audit and Transparency: The escrow account must be audited every financial year, and audit reports are submitted to the regulatory authority, ensuring proper use of funds.
  
• Warnings: Serious consequences, such as fines and possibly jail time, may be imposed on builders who misuse the buyer funds or disregard RERA escrow regulations.

The purpose of RERA’s escrow regulations is to safeguard homebuyers’ funds and ensure that projects are completed before funds are disbursed to developers.

4. Other Authorities and Related Rules

Company Law / Contract Law

While not primary regulators like RBI or SEBI, general contract law (Indian Contract Act) and company law provisions often govern how escrow agreements are drafted and enforced in private commercial contracts, especially in:

• M&A deals
  
• Business service agreements
  
• Technology contracts
  

State RERA Bodies

State Real Estate Regulatory Authorities (like TNRERA, UPRERA) also implement RERA escrow provisions and sometimes issue additional directions. For example:

• Some states may require additional deposits for project extensions to ensure funds are in escrow to protect buyer interests.
  
• States may monitor promoter compliance and allow buyers to report misuse of escrow funds in case of fraud or misappropriation detection.

Wrap Up:

With the advancement in technology, features such as escrow accounts are becoming more and more relevant, by the day. Escrow accounts are being used everywhere, right from real estate to Cryptocurrency trading. 

With the growing demand for escrow services, service providers are also increasing by the day. In such a scenario, it is imperative to do thorough research before availing of the services as frauds around escrow accounts are also rising.

Frequently Asked Questions On Escrow Accounts in India

What basic documents are required for opening an escrow account?

In order to open an escrow account, the basic documents needed are valid ID proofs of both parties, the buyer and seller, a signed copy of the escrow agreement, a signed copy of the application form submitted, the source of finances, and all KYC documents, along with valid PAN cards and AADHAR cards as ID proof of both parties. 

Who all needs to open an escrow account?

An escrow account is primarily used by individuals planning high-value transactions or high-value purchases, like a property or an investment in big projects. Companies that use escrow accounts are in the real estate industry, mergers and acquisitions, insurance companies, and people investing in e-commerce marketplaces. 

Is my money safe in an escrow account?

Yes, an escrow account is created for the sole purpose of keeping your funds secure. The funds are only released when the agreed conditions between the two parties are met. The escrow agent’s guidelines are strict, and to ensure a successful fund transfer, the parties must fulfil all conditions.  Strict rules reduce the risk of fraud and unauthorised access to the funds. 

Is an escrow account legal in India?

In India, escrow accounts are legal. Escrow accounts are maintained by a third party (an escrow agent) until the fund requirements are fulfilled and are recognised under Indian law, including the Indian Contract Act and RBI/SEBI guidelines. They are frequently used in e-commerce, M&A, and real estate (RERA), where the guidelines provide security and compliance for both buyers and sellers.  

Is there interest in an escrow account in India?

According to RBI guidelines, escrow accounts in India are non-interest bearing.

Is an escrow account frozen if a party does not hold their end of the deal?

No, the funds in an escrow account in India are never frozen. 

Moreover, if the seller is delaying the delivery of the asset, the buyer can call off the deal. They have to instruct the escrow account agent and withdraw the funds from the account

More importantly, an escrow account in India is only created for 6 months at first. If the buyer or seller wants to increase that duration, they need special permission from the RBI.

Can the escrow agent siphon off the funds in the account?

No, the escrow agent cannot use the escrow funds for personal purposes. 

According to RBI Guidelines, the agent can only transfer the funds to the seller after the buyer agrees. The buyer has to approve any action affecting the funds. 

Can the escrow agent have a bias towards the buyer and seller?

The escrow agent is a third-party player that does not have loyalties towards the buyer or the seller. 

Moreover, they work under a regulatory framework by RBI. Hence, they cannot afford to take any mal-intentioned steps with regard to the escrow funds

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