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 - 23 reviews
S
LawRatoLawRatoLawRatoLawRatoLawRato

nice article, please share more about tax on loan

Srinivasan on Jan 23, 2020
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please tell about bank loan defaults. Thanks

Ashutosh on Jan 04, 2020
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need a recovery lawyer who to call?

Ajay on Jan 06, 2020
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friend not returning loan what to do?

Kamal on Feb 12, 2020
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please refer a lawyer for loan agreement

Nilesh on Feb 08, 2020
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very good article. Good writing

Anitha on Jan 19, 2020
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nice legal article.

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Very helpful for my legal case.

Vinod on Jan 28, 2020
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very helpful

Asha on Jan 10, 2020
M
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good legal subject

Mayur on Jan 22, 2020
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Had a good time reading the article.

Kirti on Feb 01, 2020
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thanks for the information

Ruchi on Feb 08, 2020
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helpful in understanding the law

Pranav on Feb 03, 2020
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good article. Very helpful

Rahul on Dec 31, 2019
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thank you for the information

Mohit on Jan 21, 2020
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needed a lawyer….what is the procedure?

Vishal on Jan 27, 2020
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very informative.

Nidhi on Feb 02, 2020
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Ruchi on Jan 27, 2020
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very informative. Can you tell more about this

Mandeep on Jan 20, 2020
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Thanks for the detailed article.

Anurag on Jan 25, 2020
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nice article. Thanks for the information

Babu on Feb 11, 2020
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Jyoti on Jan 04, 2020

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