RERA or the Real Estate (Regulation and Development) Act, 2016 was introduced to bring transparency and accountability to India’s real estate industry. Today it is an essential for homebuyers and investors. Among several major provisions under this Act, there’s one which talks about how developers must use the money they collect from homebuyers. Now this is what is commonly referred to as the 70 pc and 30 pc rule. To understand it better, it is a financial discipline mechanism which is designed to protect homebuyers, ensuring timely completion of the project.Understanding the 70 pc and 30 pc RuleUnder RERA, promoters/developers must deposit at least 70 % of the money collected from buyers into a particular bank account. It is often called the RERA separate/escrow account. This 70 % pool of funds can be used only for specific purposes, mostly on construction and land costs. The law strictly prohibits this money being used for other businesses or marketing or administrative overheads, among others.Then the remaining 30 % of the funds can be deposited to another account. It is called the transaction account. Now promoters can use this money on project-related expenses like marketing and administrative costs and loan repayment, among others.This is the 70:30 Rule in the world of real estate! It is a financial segregation done to safeguard buyers money and ensure that the money is secured for project execution rather than risk being siphoned off into other ventures or expenses.
How it works
Collection Account (100%):All money received from buyers goes into this account. No direct withdrawals are allowed from this secured money.Separate (Escrow) Account (70%):Now withdrawals are not allowed from this pool. The funds here are reserved for land acquisition, construction and to cover other development costs, among others.Transaction Account (30%):The remaining 30 % of the money goes into a transaction account which can be used for marketing and to cover other administrative expenses and interest payments.
Why is this rule important for homebuyers and investors
Fund protection: Before RERA came into being, developers used to collect money for one project. Most of the time, the developers would use the fund on other projects and the main project was stalled or abandoned, risking buyers’ hard-earned money. The 70:30 rule is a solution for such issues.Timely completion: By introducing this rule, RERA ensures that money flows only when real work is under construction. This helps in the timely completion of the project. Transparency: This rule also creates transparency between developers and homebuyers. There’s no hidden cost or no stalling behind.
Legal punishment
If someone is caught violating the 70:30 rule, there are strict legal penalties. It might lead to suspension of registration, or legal action by the RERA authority as well. Having said these points, the rule is not foolproof. The rule struggles in many states. Enforcement depends across states. There are some developers who find ways to ditch the certifications. However, on paper, the 70:30 Rule remains one of the strongest financial safeguards for buyers.(Reference: As mentioned on page 36: https://www.indiacode.nic.in/bitstream/123456789/15131/1/the_real_estate_%28regulation_and_development%29_act%2C_2016.pdf)