Law on giving safe friendly loan in India

हिंदी में पढ़ें
September 18, 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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September 18, 2019 Law on giving safe friendly loan in India https://lawrato.com/assets/images/lawguide.png
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need a recovery lawyer who to call?

Mamta on Aug 11, 2019
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please tell about bank loan defaults. Thanks

Akhilesh on Aug 24, 2019
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friend not returning loan what to do?

Pooja on Sep 01, 2019
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nice article, please share more about tax on loan

Abhi on Sep 08, 2019
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please refer a lawyer for loan agreement

Gautam on Aug 12, 2019
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good article. Can you share more detail

Vipin on Aug 10, 2019
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thanks for the information

Samir on Sep 05, 2019
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great legal advice

Nishita on Sep 05, 2019
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loved the way concept is explained. Nicely written for any layman to understand.

Ahmed on Aug 20, 2019
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Nice one.

Sanjay on Aug 23, 2019
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needed some more information on the subject.

Amar on Sep 17, 2019
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Answered all my legal queries.

Vinayak on Aug 14, 2019
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nicely written

Sanjeev on Sep 02, 2019
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nice work. Learned a lot. Thanks

Anubhav on Aug 28, 2019
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needed a lawyer….what is the procedure?

Arun on Aug 30, 2019
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thank you for the information

Aakash on Sep 17, 2019
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nice artcile

Aniket on Sep 19, 2019
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good work

Nidhi on Sep 19, 2019
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very helpful

Aditya on Sep 09, 2019
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Detailed and informative.

Himanshu on Sep 13, 2019
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solved my queries.

Rachna on Aug 26, 2019
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nice article. Good legal advice

Prem on Aug 12, 2019
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I have legal query. Who can I call?

Rajkumar on Sep 17, 2019
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whom to contact for any legal query?

Rashmi on Aug 22, 2019
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Very nice article. English is very simple. Thank you for the information.

Harsh on Aug 06, 2019

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