Law on giving safe friendly loan in India

हिंदी में पढ़ें
November 20, 2018
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.


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.


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.


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.

Googling your legal issue online?

The internet is not a lawyer and neither are you.
Talk to a real lawyer about your legal issue.

Popular Recovery Lawyers in India

Advocate Rajesh Rai
Sector-19, Dwarka, Delhi
19 years Experience
Advocate Sunil Kumar Bakshi
Sector-16, Faridabad
32 years Experience
Advocate Saifuddin Saifee
Maharani Road, Indore
18 years Experience
Advocate J. P. Rinwa
Swej Farm, Sodala, Jaipur
18 years Experience

Related Articles

Get free legal advice from top Recovery lawyers for your specific issue

Recovery Law Articles

The Recovery of Debts Due To Banks and Financial Institutions Act, 1993

User Reviews

4.9 - 19 reviews

November 20, 2018 Law on giving safe friendly loan in India

very detailed and informative

Ranjan on Mar 07, 2019

its very helpful on the subject

Sarika on Apr 17, 2019

nice artcile

Manjula on Apr 18, 2019

needed legal advice…who to call

Aditya on Mar 29, 2019

Excellent work. Very helpful for understanding the subject.

Girish on Mar 17, 2019

thank you for the information

Srinivasan on Mar 17, 2019

Answered all my legal queries.

Chandan on Mar 09, 2019

Very informative and a good read as well.

Indu on Apr 02, 2019

Helped a lot in understanding the law.

Nitesh on Apr 05, 2019

more info needed on the law

Pravin on Mar 31, 2019

I have a case. Who can I contact?

Ayushi on Mar 29, 2019

very well written

Akhil on Apr 04, 2019

Very nice article. English is very simple. Thank you for the information.

Rohit on Mar 22, 2019

nice article

Mandeep on Mar 10, 2019

needed a lawyer….what is the procedure?

Surendra on Mar 29, 2019

Gave me a very clear idea of the subject.

Vimal on Mar 11, 2019

Very good work with the article. Gave a nice clarity about the subject.

Anshul on Apr 17, 2019

very good article. Can you tell me more about the law?

Chandra on Mar 18, 2019

good work. Keep it up

Swapnil on Apr 11, 2019