Law on giving safe friendly loan in India

हिंदी में पढ़ें
October 10, 2019
By Advocate Chikirsha Mohanty

What is a friendly loan?

A friendly loan is basically lending money to your friends or relatives for a personal reason like to help them in the time of financial difficulties.

A loan to a family member or a friend is usually an unsecured loan and the terms and conditions are basically undefined or indeterminate and demanding payback is often difficult. And if the loan goes bad, the relationship also sours. Moreover, such a loan is usually interest-free. This means you lose money.

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Is there any legal document so that you can clearly define the terms and conditions of a friendly loan?

There are two ways of doing this:



A Promissory note is a written promise to pay a debt. It is a financial instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed, determinable future time or on demand of the payee subject to specific terms and conditions.

If you wish to keep it simple and only for the record, go for a promissory note. This instrument comes under Section 4 of the Negotiable Instruments Act, 1881, and has to be signed by the borrower.

A Loan Agreement (Loan Contract) acknowledges that there is a loan, specific promise to pay and also states that the lender has a right to recourse. An example can be a FORECLOSURE. If you want to have a right to recourse, then go for Loan Agreement instead of a Promissory Note.

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What is the tax implication on loans between friends/family?

A friendly loan is generally without any interest and there is no provision to charge any notional interest on the same. But if you charge interest rate then interest earned on loan has to be treated as “Income from other sources.” This income should be shown in your (lender) Income Tax Return.

If you borrow money from your friend/relative to construct a house, the repayments are not eligible for tax deductions. Tax deduction under Section 80c with respect to principal repayment is not allowed. But Tax benefit under Section 24 of the Income Tax Act can be claimed as Tax deduction with respect to Interest paid on loan. The main criteria is ‘the loan should not be for personal use.

Gifts from family members are not taxable, neither are the loans. But any gift above Rs 50,000 from a friend during a financial year is taxable. However, if it's a loan (with or without interest), it becomes tax-free.

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What precautions should be taken while lending/accepting friendly loans?

  • All loan transaction should be by account payee cheque or bank draft

  • If you are giving loan which is interest free ensure that loan is out of your own savings and not from interest bearing borrowed funds.

  • Be cautious regarding creditworthiness of your lender.


These guides are not legal advice, nor a substitute for a lawyer
These articles are provided freely as general guides. While we do our best to make sure these guides are helpful, we do not give any guarantee that they are accurate or appropriate to your situation, or take any responsibility for any loss their use might cause you. Do not rely on information provided here without seeking experienced legal advice first. If in doubt, please always consult a lawyer.

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User Reviews

4.6 - 20 reviews

please tell about bank loan defaults. Thanks

Navin on Jul 20, 2021

please refer a lawyer for loan agreement

Raghav on Jul 11, 2021

friend not returning loan what to do?

Shrikant on Jun 09, 2021

nice article, please share more about tax on loan

Shiva on Jul 06, 2021

need a recovery lawyer who to call?

Swetha on Jun 19, 2021

nice article. Thanks for the information

Meenakshi on Jul 21, 2021

nicely written. Great work

Aarti on Jul 18, 2021

thanks for the legal advice

Pratibha on Jul 15, 2021

nice work with the article.

Sahil on Jun 24, 2021

Gave a clear understanding about my legal issue.

Jyothi on Jun 14, 2021

needed a lawyer….what is the procedure?

Shikha on Jul 13, 2021

Excellent work. Very helpful for understanding the subject.

Ankur on Jun 13, 2021

good advice. Who can I contact for my legal issue?

Reena on Jul 15, 2021

very nice article

Syed on Jul 17, 2021

good legal subject

Aruna on Jun 22, 2021

thanks for the advice

Madhuri on Jun 21, 2021

Very helpful in understanding the law.

Sanjeev on Jul 21, 2021

amazing article

Srinivas on Jul 09, 2021

very informative. Can you tell more about this

Chandan on Jul 07, 2021

very detailed and informative

Mandeep on Jun 24, 2021