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.



 

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A
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please tell about bank loan defaults. Thanks

Asha on Dec 04, 2021
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nice article, please share more about tax on loan

Manohar on Dec 22, 2021
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please refer a lawyer for loan agreement

Gautam on Jan 13, 2022
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friend not returning loan what to do?

Bhaskar on Dec 06, 2021
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need a recovery lawyer who to call?

Prabhu on Jan 04, 2022
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good article. Can you share more detail

Karthik on Jan 06, 2022
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very informative. Can you tell more about this

Anand on Dec 03, 2021
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Monika on Dec 13, 2021
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good work

Ayushi on Dec 25, 2021
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good work

Ashwin on Dec 30, 2021
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Helped a lot in understanding the law.

Ashish on Dec 21, 2021
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great content. Thanks.

Senthil on Dec 13, 2021
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very informative.

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nice article. Good legal advice

Aniket on Dec 26, 2021
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Tells all the legalities about the subject. Good work.

Vikas on Dec 19, 2021
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Avinash on Jan 16, 2022
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Ashok on Jan 10, 2022
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good article. Very helpful

Ritesh on Dec 16, 2021
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Nishant on Jan 03, 2022
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Venkat on Dec 30, 2021
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nice artcile

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Abhijit on Jan 16, 2022
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very well written

Divya on Dec 22, 2021
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