What Is an Escrow Account? How It Works in India

By BillCut
Last updated: September 2026

An escrow account holds money that has left the payer but has not yet reached the receiver. A third party keeps it until an agreed condition is met, and only then does it move. You are inside one more often than you think, starting with every payment you make to an online seller.

The word is also used loosely, and telling a real arrangement from a described one is most of what this page is for.

What Is an Escrow Account?

An account held by a neutral third party, containing money that belongs to neither of them yet.

Three parties are involved and each has a different position.

Party	What they have done	What they are waiting for
The payer	Paid the money out of their own account	The thing they paid for, or the money back if it does not arrive
The receiver	Agreed to do something before being paid	Release of the money once the condition is met
The holder	Taken custody of the money without owning it	Evidence that the condition has been met, and instructions

The point of the arrangement is the gap in the middle. Without it, one side has to go first and carry the risk of the other side not following through. With it, the money is provably committed but not yet released, which is a different and much weaker promise to break.

The word escrow describes the arrangement rather than a product. What varies between situations is who is allowed to hold the account, what counts as the condition and who decides it has been met.

How Does an Escrow Account Work, Step by Step?

In four stages, and the third one is where arrangements differ most.

Stage	What happens	What to establish before you rely on it
Deposit	The payer transfers the money to the escrow account rather than to the receiver	Whose account it is, and at which bank
Condition	The agreement sets out exactly what must happen before release	That the condition is written down and specific rather than described in a sales conversation
Verification	Somebody confirms the condition has been met	Who that somebody is, and whether they are independent of the receiver
Release or return	The money goes to the receiver, or back to the payer	How long a return takes, and what happens if the two sides disagree

Most disputes about escrow are not about the money being stolen. They are about the third stage. If the person deciding that the condition has been met is the same person waiting to be paid, the arrangement is doing much less work than it appears to.

Timing is the other thing to settle in advance. An escrow arrangement with no stated outer limit can hold money indefinitely while two parties argue, which is a worse position than not paying yet. A date by which the condition must be met, and a stated consequence if it is not, turns an open-ended hold into a defined one.

Where Do You Meet an Escrow Account in India?

In four common situations, three of which most people never notice.

Situation	Whose money is held	What releases it
Paying an online seller through a payment gateway	Yours, until the payment aggregator settles it to the merchant	The settlement terms agreed between the aggregator and the merchant
A balance sitting in a wallet	Yours, held against the outstanding value of the wallet	You spending it, or withdrawing it where permitted
Paying for a flat that is still being built	Yours, in a separate project account	Construction progress, certified by three independent professionals
A private sale of property or a business	Both sides’ obligations, held by a bank or a law firm	Whatever the contract says, agreed by both parties in advance

The first two are regulated arrangements you never see. The third is statutory and is the one worth knowing in detail if you are buying property. The fourth is a contract you negotiate, which means the protection is only as good as the wording.

The wallet case sits alongside cards and virtual accounts as one way of holding money before you spend it, and the practical differences between them are set out in this comparison of wallets, cards and virtual accounts.

What Stops the Holder Using the Money?

A rule that the account may be used for one purpose only, backed by a specific legal designation.

Under the Reserve Bank of India (Regulation of Payment Aggregators) Directions, 2025, dated 15 September 2025, a non-bank payment aggregator shall maintain the funds collected on behalf of its merchants in a separate escrow account with any scheduled commercial bank in India, and such escrow accounts shall only be utilised for authorised payment aggregator business and not for any other business. For the purpose of maintaining that account, the payment system operated by the aggregator is deemed to be a designated payment system under Section 23A of the Payment and Settlement Systems Act, 2007. No interest is payable on the balances except on the core portion of the domestic escrow account.

The same structure applies to wallet balances. Under the Reserve Bank of India Master Directions on Prepaid Payment Instruments, 2021, updated to 27 December 2024, a non-bank issuer is required to maintain the outstanding balance in an escrow account with any scheduled commercial bank, the agreement with that bank must include a clause enabling the bank to use the money only for the purposes in the directions, and the payment system is likewise deemed a designated payment system under Section 23A.

That designation is the part worth understanding. It is not a promise from the company holding your money. It is a status given to the account itself, which is why the protection survives the company’s own commercial problems in a way that a mere undertaking would not.

When the money reaches the merchant is a separate question, governed by the agreement between the aggregator and the merchant, and it is covered from the merchant’s side in this piece on payment aggregator settlement rules.

How Does the Escrow Account Work When You Buy an Under-Construction Flat?

Seventy per cent of what you pay has to go into a separate account, and it can only come out against progress.

This is the escrow arrangement with the most direct consequences for an individual, and it is statutory. As set out in the directions on compliance with Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016, published by the Haryana Real Estate Regulatory Authority, seventy per cent of the amounts realised for a real estate project from the allottees must be deposited in a separate account maintained in a scheduled bank, to cover the cost of construction and the proportionate land cost, and used only for that purpose. Withdrawal from that account is in proportion to the percentage of completion of the project, and requires certification by an engineer, an architect and a chartered accountant in practice. The promoter must also get the accounts audited within six months after the end of every financial year by a chartered accountant in practice.

The figures below are illustrative. Assume you have paid Rs 40,00,000 in instalments for a flat still under construction.

What you paid	Where it must sit	How it comes out
Rs 28,00,000, being seventy per cent	The separate project account in a scheduled bank	Only in proportion to completion, certified by an engineer, an architect and a chartered accountant
Rs 12,00,000, being the remaining thirty per cent	Not subject to that restriction	Available to the promoter

Two practical points follow. The certification is by three separate professionals, which is the closest thing in Indian escrow practice to an independent verifier rather than an interested one. And the restriction is on the project account, not on your individual payment, so the protection is collective rather than personal.

When Is an Escrow Account Not Allowed?

When the money is yours to receive and somebody else wants to hold it on the way.

Escrow is a protection in some places and a prohibited structure in others, which is a distinction the word itself hides. Under the Reserve Bank of India Digital Lending Directions, 2025, issued on 8 May 2025, disbursement of a loan by the regulated entity shall always be made into the bank account of the borrower, except for disbursals covered exclusively under a statutory or regulatory mandate, and in no case shall disbursal be made to a third party account including the accounts of a lending service provider.

So a loan may not be routed through an intermediary’s account on its way to you, however it is described. If an app explains that your loan is sitting in its escrow or settlement account pending release, that is not an escrow protection, and what should have happened instead is set out in this explainer on what loan disbursement is.

The same logic explains why some newer arrangements block money rather than move it. An insurance premium can now be blocked in your own bank account until the policy is issued, which achieves the escrow purpose without the money leaving you at all, and that mechanism is described in this piece on paying an insurance premium through UPI.

What Does an Escrow Account Not Protect You From?

Most of the things people assume it covers.

• It does not judge quality. If the condition was delivery and something was delivered, the money is released, whatever the condition of what arrived.
• It does not make the other side solvent. It protects the sum in the account, not the obligations beyond it.
• It is not deposit insurance. The money is held for a purpose, and the protection comes from the restriction on its use rather than from a guarantee of repayment.
• It does not resolve a disagreement. If the two sides dispute whether the condition was met, escrow holds the position while that is settled somewhere else, which can take a long time.
• It does not help at all if the arrangement is informal. An ordinary bank account belonging to an intermediary is not an escrow account merely because somebody calls it one.

That last point is the one that costs people money. The protections above come from a specific legal designation or a specific statute. A message saying funds are held in escrow, with no named bank and no written condition, is a description rather than a safeguard.

Where the arrangement is genuinely contractual, such as a private sale, the safeguard is the wording rather than the label. A bank or law firm acting as an escrow agent acts on the written instruction it was given and nothing else, so an instruction that is vague about who confirms what will produce a vague outcome. That is worth paying a professional to draft rather than settling by message.

What Should You Check Before Paying Into One?

Five things, and all of them should be answerable in writing before you transfer anything.

• Which bank holds the account, and is it a scheduled bank. If nobody will name the bank, stop there.
• What exactly is the condition for release, written down, with no room for the receiver to decide it has been met on their own.
• Who verifies that the condition has been met, and are they independent of the person waiting to be paid.
• What happens if the condition is not met, how the money comes back, and how long that takes.
• Whether the arrangement is one the law requires, such as the project account for an under-construction property, or one somebody has offered you. The first has rules behind it and the second has only the contract.

If something goes wrong with a regulated entity holding the money, complain to that entity in writing first and keep the reference number. If it is not resolved, the escalation route is the Reserve Bank Integrated Ombudsman Scheme, introduced on 12 November 2021, through the portal at cms.rbi.org.in with a contact centre on 14448. For a real estate project account, the complaint goes to the real estate regulatory authority of the state the project is registered in rather than to the Reserve Bank.

Frequently Asked Questions

This article is for information only. It is not financial or legal advice, and it does not recommend any platform, bank, builder or service. Rules change and arrangements differ, and the figures in the example are illustrative rather than any project’s terms, so read the agreement that governs your own transaction and confirm the current position with the bank, the Reserve Bank of India or the real estate regulatory authority of your state, and consult a qualified professional about your own situation.