Best Separate Project Account (70% Rule) Compliance Lawyer

Before RERA, the money buyers paid for an under-construction flat went into the developer's general pool. It could be used to buy land for the next project, pay off a loan on an older one, or simply fund the company's overheads. When the market slowed in the 2010s, many NCR buyers discovered that the money they had paid for their tower had been spent somewhere else entirely, and that there was nothing left to finish it.

The 70% rule is RERA's answer to that problem. It's short, it sits in a single sub-clause of the Act, and it's one of the provisions that matters most to buyers and causes most practical difficulty for developers. This page explains what the rule requires, how the account is usually set up and run, how withdrawals and the annual audit work, and what happens when things go wrong.

What the Act requires

Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016 requires the promoter, as part of the declaration filed with its registration application, to commit that:

• seventy per cent of the amounts realised for the project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank;
• that money shall be used only to cover the cost of construction and the land cost, and only for that purpose;
• the promoter shall withdraw amounts from the account to cover the cost of the project in proportion to the percentage of completion of the project;
• withdrawals shall be made after it is certified by an engineer, an architect and a chartered accountant in practice that the withdrawal is in proportion to the percentage of completion; and
• the promoter shall get its accounts audited within six months after the end of every financial year by a chartered accountant in practice, who shall verify, during the audit, that the amounts collected for a particular project have been used for that project and that the withdrawals have been in compliance with the proportion to the percentage of completion.

A proviso allows the appropriate government, after consultation with the authority, to notify a lesser percentage in some cases. The NCR states have generally kept the 70% figure.

The remaining 30% of buyers' money can be used by the developer for other purposes connected with its business, such as marketing, overheads and profit. That's a deliberate balance: the Act doesn't try to ring-fence everything, only enough to make sure the project can be built.

What "amounts realised from allottees" means

This sounds obvious but isn't always. Questions that come up regularly include:

• Taxes collected. GST and similar amounts collected from buyers are not really the developer's money; they are payable to the government. Several authorities have clarified that statutory dues such as GST and stamp duty collected from buyers are excluded from the 70% calculation, but the position should be checked against the current directions of the relevant authority.
• Charges for specific items such as club membership, maintenance deposits and interest-free maintenance security. These are often treated differently, depending on the state's directions and on whether they are part of the price of the unit.
• Money received before registration. For ongoing projects registered in 2017, authorities generally required the 70% rule to apply to the balance amounts collected after registration, and in some cases also required the developer to deposit in the account the unspent portion of earlier receipts. The detail varies.
• Money from the sale of unsold units after completion. Once the project is complete and the registration closed, the rule usually stops applying, though authorities have taken different views on timing.

What "cost of construction and land cost" means

Withdrawals are allowed only for these two heads. State rules usually define them. Typically:

• Land cost includes the cost of acquiring the land (or the premium paid to a development authority for a lease), and amounts paid for approvals and charges linked to the land, such as conversion charges, external development charges, infrastructure development charges and similar dues, subject to how the state rules define it.
• Cost of construction includes all expenditure on the physical development of the project, including the buildings, common areas, internal infrastructure and amenities, and associated costs such as the fees of architects and engineers, statutory fees for construction approvals, and in some states interest on construction finance taken for the project.

Marketing, brokerage, general overheads and profit are not covered and must come out of the 30%.

How the accounts are usually structured

The Act speaks of one separate account. In practice, several authorities have prescribed a more detailed structure, often with three accounts for each project:

• a collection account, into which all money received from buyers for the project is paid, from which nothing can be withdrawn except by transfer to the other two accounts;
• a separate RERA account (often called the designated or 70% account), into which 70% of every receipt is transferred automatically; and
• a free or transaction account, into which the balance 30% is transferred and which the developer can use freely.

Haryana and Maharashtra are among the states whose authorities have issued directions along these lines. Where a state hasn't, the developer can still adopt this structure voluntarily, and we usually recommend it: it removes most of the risk of forgetting to transfer money into the RERA account, and it makes the annual audit much simpler.

A few practical points:

• One RERA account per registered project or phase. If two phases are separately registered, they need separate accounts. Pooling them is one of the commonest audit findings.
• A scheduled bank. The account must be with a scheduled bank. Most developers use the bank that provides their construction finance.
• Standing instructions. The bank should have written standing instructions to sweep the 70% portion of every credit into the RERA account, ideally on the same day.
• Buyers' payment instructions. Demand letters, the allotment letter and the agreement should all direct buyers to pay into the collection account. Payments that come into the developer's general account by mistake must be transferred promptly.
• Home loan disbursements. Banks disbursing home loans need the right account details. Disbursements to the wrong account are a common reason for gaps.
• Disclosure. The account details are disclosed on the project's RERA page. Changing the bank or the account needs updating there and, in some states, the authority's approval.

Withdrawals

Money can be withdrawn from the RERA account only in proportion to the percentage of completion, and only on certificates from three professionals.

The three certificates

Most states prescribe formats for these. In many, they're referred to as Form 1 (the architect's certificate of the percentage of completion of construction work), Form 2 (the engineer's certificate of the cost incurred on construction and the estimated balance cost) and Form 3 (the chartered accountant's certificate of the amount withdrawable, based on the cost incurred and the proportion of completion). The names and exact contents differ from state to state.

In broad terms:

• the architect certifies how much of the work has been done, building by building and for common areas;
• the engineer certifies the cost of construction incurred so far and the estimated cost of completion; and
• the chartered accountant works out, on the basis of the estimated total cost of the project (land plus construction) and the percentage of completion, how much can properly be withdrawn, and certifies that the withdrawal is within that limit.

The proportion calculation

Here's a simplified, made-up example. A project's estimated land cost is Rs 80 crore and estimated construction cost is Rs 220 crore, so the total estimated cost is Rs 300 crore. The architect certifies that the project is 40% complete. The land cost has been fully incurred. The developer has incurred Rs 90 crore on construction.

The cost incurred to date, as certified, is Rs 170 crore (Rs 80 crore land plus Rs 90 crore construction). Depending on the state's formula, the chartered accountant will compare this with what has already been withdrawn from the RERA account and certify how much more may be withdrawn to reimburse the developer for cost actually incurred, without exceeding the proportion to completion. If the RERA account has Rs 120 crore in it and Rs 100 crore has already been withdrawn, the further amount withdrawable is calculated from those figures under the state's prescribed method, and is usually limited to costs actually incurred and not yet reimbursed.

The calculation isn't complicated, but it depends on the estimated total cost being realistic. If estimated costs are inflated, or the percentage of completion overstated, withdrawals run ahead of the work, and the account may not have enough left to finish the project. That's exactly what the rule is meant to prevent, and auditors and authorities look for it.

Good practice on withdrawals

• Withdraw on a regular cycle, such as monthly or quarterly, with all three certificates prepared at the same time and on the same data.
• Keep the certificates, the bank statements and the calculation together in a single file for each withdrawal.
• Revise the estimated cost when it genuinely changes, with a note explaining why, and reflect it in the next quarterly update.
• Don't withdraw first and get certificates later. Auditors and authorities treat back-dated certification very seriously.

The annual audit

Within six months after the end of every financial year, the promoter's accounts must be audited by a practising chartered accountant, who must verify that the amounts collected for the project were used for it and that withdrawals were in proportion to completion. Most states prescribe an annual report on the project account (often called Form 5 or a similar name), signed by the auditor, which must be uploaded on the portal. Some states require it to be uploaded within a fixed period after the year end, often by the end of September or a similar date.

The audit usually looks at:

• whether all amounts received from buyers for the project were deposited in the collection account (or directly into the RERA account in the proportion required);
• whether 70% was transferred to the RERA account;
• whether every withdrawal from the RERA account was supported by the three certificates and was within the permitted proportion;
• whether withdrawn amounts were spent on the project's land and construction cost; and
• whether there were any transfers from the RERA account to other projects, related parties or general purposes.

Where the auditor finds that something went wrong, the report should say so. A qualified report isn't the end of the world if the developer has already fixed the problem, for instance by putting back an amount that was wrongly withdrawn, and the report records that. An unqualified report that later turns out to be wrong is far worse, for the developer and for the auditor.

The annual report is one of the most commonly missed filings. A developer that doesn't upload it will usually receive a notice from the authority, and in some states a late fee or penalty is charged automatically. See our page on ongoing compliance.

When the money is not in the account

The rule is easy to state and easy to break. The problems we see most often are:

• Collections going into the wrong account, so that 70% is never transferred.
• Withdrawals ahead of progress, based on optimistic percentages or inflated cost estimates.
• Transfers to group companies labelled as advances to contractors, land payments or loans, which turn out to be for other projects.
• Pooling of phases, where money from one registered phase is used for another.
• Lender sweeps, where a construction lender's security arrangements allow it to take money out of the project accounts to service its loan.

The consequences can be serious. Section 60 provides for a penalty of up to 5% of the estimated cost of the project for providing false information or contravening Section 4, and Section 61 for a penalty of up to 5% for other contraventions. The authority can call for records under Section 35, order an inquiry, appoint a forensic auditor, issue directions under Section 37 (including directions to restore money to the account) and, in serious cases, revoke the registration under Section 7 and act under Section 8. Diversion of buyers' money can also attract criminal proceedings under general criminal law, separately from RERA.

The Supreme Court's handling of the Amrapali group's projects (Bikram Chatterji v. Union of India, 2019) is the best-known example of what happens at the extreme end. A court-ordered forensic audit traced large sums of buyers' money diverted from projects; the court cancelled the group's registrations and directed that the projects be completed by a government-owned company under the court's supervision. The 70% rule exists so that projects don't reach that point.

Bank loans and the RERA account

Construction lenders often take security over a project's receivables, including the RERA account. That creates a tension: the Act says the account is for land and construction cost, while the loan documents may give the lender rights to sweep money out to repay the loan.

Some states' rules treat interest on construction finance taken specifically for the project as part of the cost that can be met from the RERA account. Beyond that, lenders' rights over the account are a contested area, and the answer depends on the documents, the state's rules and, where insolvency is involved, the approach the tribunals take. Developers negotiating construction finance should make sure the loan documents are consistent with the RERA requirements, and lenders increasingly insist on this themselves. Buyers worried about a lender sweeping money out of their project's account should raise it with the authority, which can issue directions.

Insolvency and the RERA account

When a developer goes into insolvency, the question arises whether money in the RERA account belongs to the general pool available to all creditors or must be used to complete the project. Tribunals dealing with real estate insolvencies have often treated project account money as meant for completing the project, and resolution plans commonly ring-fence it for that purpose. But the position isn't fully settled and depends on the facts. See our page on builder insolvency.

What buyers can do

For buyers, the 70% rule is mostly invisible until something goes wrong. A few things are worth knowing.

• Check the portal. The project's RERA page usually shows the bank account details and, where filed, the annual audit reports and quarterly updates. Missing audit reports, or reports with qualifications, are a warning sign.
• Pay into the right account. Buyers should pay only into the account named in the agreement or demand letter, and should be wary if asked to pay into a different account, especially a group company's.
• Ask questions collectively. An association of allottees or a group of buyers can write to the developer asking for the latest certificates and audit report, and can ask the authority to call for records if the answers aren't satisfactory.
• Complain to the authority. Diversion of funds is a violation of the Act. Buyers can file a complaint under Section 31 asking the authority to investigate, order a forensic audit and direct restoration of money to the account, in addition to their own claims for delay or refund. Our page on group complaints explains how buyers can act together.

A complaint about diversion is strongest when it is specific. "The builder must have diverted money because the project is delayed" is a guess. "The audit report for 2023-24 shows withdrawals of Rs 40 crore against certified progress of 15%, and the money went to a group company" is evidence.

Setting it up properly: a checklist for developers

1. Open the collection, RERA and free accounts (or at least the RERA account) for each registered project or phase, with a scheduled bank, before taking bookings.
2. Give the bank written standing instructions for automatic transfers of 70% to the RERA account.
3. Put the correct account details in the application form, allotment letter, agreement, demand letters and on the portal.
4. Agree on the estimated cost of the project with the architect, engineer and chartered accountant, and record the basis.
5. Set a regular withdrawal cycle with all three certificates prepared together.
6. Keep a withdrawal file for each cycle.
7. Reconcile collections with the sales system every month, and correct misdirected payments promptly.
8. Make sure construction finance documents are consistent with the RERA requirements.
9. Book the annual audit early, and upload the report well before the deadline.
10. Reflect the account's status in each quarterly update.

How we help

For developers, we advise on setting up the account structure, draft the bank instructions and the relevant clauses in buyer documents, review loan documents for consistency with RERA, prepare internal procedures for withdrawals, review certificates and audit reports before filing, and handle notices, inquiries and penalty proceedings where problems have arisen. Where money has gone where it shouldn't, we help plan how to restore the position and how to present it to the authority.

For buyers and associations, we review the project's filings, advise on whether there is evidence of diversion, and file complaints asking the authority to investigate and act.

We work alongside the developer's or buyers' chartered accountants. The legal and accounting sides of the 70% rule can't really be separated, and the best results come when both are looked at together.

Frequently asked questions

What is the RERA 70% rule?

Section 4(2)(l)(D) requires 70% of the money collected from buyers for a project to be kept in a separate account with a scheduled bank and used only for the project's land and construction cost.

Can the builder use the remaining 30%?

Yes. The balance can be used for other business purposes such as marketing, overheads and profit.

How can the builder withdraw money from the 70% account?

Only in proportion to the percentage of completion, and only after an engineer, an architect and a practising chartered accountant certify that the withdrawal is in that proportion.

Is GST included in the 70%?

Several authorities have said statutory dues such as GST and stamp duty collected from buyers are excluded, but check the current directions of the relevant state authority.

Does each phase need its own account?

Yes, where phases are separately registered. Pooling money across phases is a common audit finding and a contravention.

When is the annual audit report due?

The audit must be done within six months after the end of the financial year, and most states require the report to be uploaded on the portal within a set time.

What can buyers do if they suspect diversion of funds?

Check the filings on the portal, ask the developer for the certificates and audit report, and file a complaint asking the authority to investigate, order a forensic audit and direct the money to be restored.

What is the penalty for not maintaining the account?

Penalties of up to 5% of the estimated project cost under Sections 60 or 61, directions to restore funds, and in serious cases revocation of registration. Criminal law may also apply to diversion.

General information about the separate project account under Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 2016. Account structures, certificate formats, definitions of land and construction cost, and filing deadlines are set by state rules and authority directions, which differ and change. Not legal or accounting advice.