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Everything You Need to Know About Escrow Accounts in India

Escrow Account in India

Whether you’re a first-time homebuyer, a business owner, or simply curious about how escrow accounts work, this blog aims to comprehensively understand their purpose and significance.
An escrow account is a financial arrangement where a neutral third party holds funds or assets for two parties. In this blog, we will understand in detail why Escrow accounts are crucial in facilitating secure and transparent financial transactions. Whether you are a buyer, seller, or even a financial institution, understanding the concept and functioning of escrow accounts is essential.

What is an Escrow Account?

An Escrow Account is a financial arrangement where a third party holds an asset or money on behalf of two other parties, the buyer and the seller, to facilitate a transaction. The escrow agent manages escrow accounts, which is a third-party account that stores funds until buyers and sellers meet all the terms and conditions. This temporary account is closed when a transaction is completed, and the funds are transferred to the seller’s account.
The Escrow agents only release the assets or funds after fulfilling predefined contractual obligations.

An escrow account is a financial arrangement where a neutral third party holds and regulates funds on behalf of two parties involved in a transaction. This could be a buyer and seller, landlord and tenant, or a borrower and lender. An escrow account ensures a secure and transparent transaction by minimizing the risk for all parties involved.

How does an Escrow Account work?

When using an escrow account, the buyer deposits the funds into the account held by a trusted third party, typically a bank or a financial institution. The funds remain in the account until all parties meet certain predetermined conditions, as agreed upon. This ensures parties can access the funds once the terms and conditions are fulfilled.

For example, in the real estate sector, when a buyer wants to purchase a property, they deposit the purchase amount into an escrow account. Upon receiving the payment, the seller transfers the property ownership to the buyer, ensuring the buyer’s funds are protected until they receive the property title. Similarly, in a rental agreement, the tenant pays the security deposit into the escrow account, which is held until the end of the tenancy to ensure the landlord’s protection.

The key parties involved in an escrow account are:

1. Buyer: The purchasing company or individual
2. Seller: The supplier, factory or a trading company
3. Escrow Agent: The third-party escrow service provider, usually a bank or financial institution
4. Regulatory Authority: In India, the Securities and Exchange Board of India (SEBI) regulates escrow accounts and ensures compliance with the legal framework.

Escrow account

Escrow Account involves several steps


Agreement between all parties to use an escrow account for the transaction and determine the conditions needed to release funds.

Depositing Funds

The buyer deposits the funds into the escrow account.


The escrow agent verifies the funds and ensures they comply with the agreed-upon terms and conditions.

Terms and Conditions

Once the predetermined conditions are met, the funds are released from the Escrow Account to the seller’s account.


After completing the transaction, the escrow account is closed, and any remaining funds are returned to the buyer.

Eligibility Criteria for Registering for Udyam Aadhar

Type of Enterprise

Udyam Aadhaar registration is applicable only to micro, small, and medium-sized enterprises (MSMEs) operating in India. It is not available for larger enterprises.

Classification Based on Investment and Turnover

The eligibility of an enterprise for Udyam Aadhar registration is determined based on its investment in plant and machinery or equipment and its annual turnover. The criteria differs for micro, small, and medium enterprises.


To register for Udyam Aadhar, the enterprise needs to provide a self-declaration stating its existence, type of organisation (Proprietorship, Partnership, Company, etc.), and other relevant details.

Valid Aadhar Number

The Aadhar number of the authorised signatory of the enterprise is required for Udyam Aadhar registration.

Benefits of using an Escrow Account in India

Using an escrow account in India provides several benefits for both buyers and sellers. Here are the key advantages of using an escrow account in financial transactions:


One of the primary benefits of using an escrow account is its increased security level. By depositing funds into the account, the buyer ensures that their money is protected until the agreed-upon conditions are met; this minimizes the risk of fraud or misuse of funds, giving both parties peace of mind.


Escrow accounts offer transparency to all parties involved. Buyers and sellers have visibility into the funds and the transactions. This transparency fosters trust and ensures everyone is informed about the transaction’s status.

Dispute Resolution

Escrow accounts play a crucial role in resolving disputes that may arise during a transaction. In a disagreement or non-compliance with the agreed-upon conditions, the neutral third party, the escrow agent, can act as a mediator and help resolve the issue unbiasedly, thus avoiding potential legal disputes and allowing a smoother transaction process.

Legal Protection

Escrow accounts adhere to legal and regulatory requirements set by authorities such as the Securities and Exchange Board of India (SEBI). To ensure transactions are conducted lawfully, providing legal protection for all parties. By utilising escrow account services, buyers and sellers can be confident that their transactions comply with laws and regulations.

Escrow Account

How To Set up An Escrow Account In India?


The first step is for the buyer, seller, or any other involved party to agree on the need for an escrow account and select a trusted agent. The escrow agent’s job is to keep the money safe and only release it when the terms have been met.

Opening the Escrow Bank Account

Like any regular bank account, this also involves providing the necessary documentation and information, such as identification, proof of address, and transaction details.

Deposit of Funds

The buyer can pay through various online methods or cheques into the escrow account. Ensuring that the deposited funds are in the correct escrow account and that all details are accurately provided.


The escrow agent verifies the receipt of funds and confirms that all necessary documents and information are accurate. This step is crucial to ensure that the transaction can proceed smoothly.

Fulfilment of Conditions

The escrow account holds the funds until the agreed-upon conditions are fulfilled. These conditions can include various aspects, such as property inspections, document verification, or completion of certain milestones. Once the conditions are met, the escrow agent proceeds with the disbursement of funds according to the terms of the agreement.


Upon fulfilment of the conditions, the escrow agent disburses the funds as per the agreement. This can include releasing the funds to the seller, returning the funds to the buyer, or distributing the funds to other parties involved in the transaction, such as agents or brokers. After the disbursement, the escrow account is closed.


Throughout the process, the escrow agent maintains proper documentation and records of the transactions.

Role of the Escrow Agent

The role of the escrow agent is crucial in facilitating secure and transparent financial transactions. Acting as a neutral party, the escrow agent ensures the smooth progression of the transaction, safeguarding funds, and upholds the agreement’s integrity.

Here are some key responsibilities and functions of the escrow agent:

  • Neutral Facilitator
  • Custodian of Funds
  • Verification and Compliance
  • Impartial Decision-Maker
  • Disbursement of Funds
  • Documentation
  • Compliance with Legal and Regulatory Requirements

Effective management of an Escrow Account

Managing an escrow account effectively is essential for smoothly and securely handling financial transactions. Whether you are a buyer or a seller, following the practices will help you navigate the process and maximise the benefits of escrow accounts:

  • Choose a Reliable Escrow Agent
  • Clearly Define Terms and Conditions
  • Maintain Transparency and Communication
  • Promptly Fulfil Obligations
  • Maintain Accurate Records
  • Regularly Review Account Activity
  • Seek Professional Advice if Needed


Escrow accounts are an integral part of various financial transactions in India. These accounts provide a secure mechanism for holding and managing funds until specific conditions are fulfilled. Whether real estate transactions or mergers and acquisitions, escrow accounts play a crucial role in protecting the interests of all parties involved. It is essential for individuals and businesses to understand the concept of escrow accounts and their significance in ensuring smooth and secure transactions.


1. Who acts as the Escrow Agent in India?

Ans: In India, banks often act as Escrow Agents. They ensure the proper handling of funds, compliance with regulations, and impartiality in facilitating the transaction.

2. What types of transactions commonly use Escrow Accounts in India?

Ans: Escrow Accounts are commonly used for real estate purchases, mergers and acquisitions, business transactions, large-scale contracts, and any situation where a significant amount of money or valuable assets are involved.

3. Who acts as the Escrow Agent in India?

Ans: In India, banks often act as Escrow Agents. They ensure the proper handling of funds, compliance with regulations, and impartiality in facilitating the transaction.

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