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:

  • PROMISSORY NOTE (or)

  • LOAN AGREEMENT

 

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


4.5 - 21 reviews
K
LawRatoLawRatoLawRatoLawRatoLawRato

nice article, please share more about tax on loan

Kishan on Aug 22, 2020
C
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please tell about bank loan defaults. Thanks

Chandra on Aug 09, 2020
A
LawRatoLawRatoLawRatoLawRatoLawRato

please refer a lawyer for loan agreement

Akhil on Sep 13, 2020
G
LawRatoLawRatoLawRatoLawRato

friend not returning loan what to do?

Gautam on Sep 16, 2020
K
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need a recovery lawyer who to call?

Kalpana on Sep 10, 2020
S
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good work. Keep it up

Sandip on Sep 03, 2020
G
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helpful in understanding the law

Gurpreet on Sep 07, 2020
K
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good article. Please provide more info

Karthik on Sep 13, 2020
P
LawRatoLawRatoLawRatoLawRatoLawRato

thanks for the information

Prakash on Aug 10, 2020
N
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nice article

Niraj on Aug 13, 2020
G
LawRatoLawRatoLawRatoLawRatoLawRato

good article. Can you give some more detail on the issue.

Gaurav on Aug 19, 2020
S
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The writer has explained the law perfectly.

Shraddha on Sep 07, 2020
M
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excellent article. Very informative

Manisha on Sep 04, 2020
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thanks for the information

Rajeev on Aug 20, 2020
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very good article. Please provide more information on the subject

Harsha on Sep 20, 2020
G
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Very helpful for my legal case.

Gayatri on Aug 08, 2020
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Written plainly to be understood by anyone who is from a non-legal background.

Uday on Sep 11, 2020
R
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thanks for the legal advice

Ramesh on Aug 06, 2020
P
LawRatoLawRatoLawRatoLawRato

nice article. Good legal advice

Prasanna on Aug 15, 2020
V
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very good article. Can you tell me more about the law?

Varsha on Aug 26, 2020
S
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nicely written. Great work

Sanjay on Aug 09, 2020

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