Any specific format for loan agreement? Can I charge interest on friendly loan?

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  • #2320

    Anonymous
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    If I want to give loan to a friend, is it necessary to record the loan transaction in any specific format of loan agreement? Also, can I legally charge any interest from my friend for the loan given to him and is there any legal restriction on such interest?

  • #2329

    There is no specific format for a loan agreement. In fact, it is not even mandatory that every loan agreement must be in writing. Many small / friendly loan transactions take place without any written agreement. Even where a written agreement is executed, there is no specific format. You can reduce into writing all details of the loan, including (1) date and time of giving loan; (2) mode of giving such as by cheque, etc. (3) details of cheque, etc., (4) name and addresses of parties to the agreement; (5) term of the loan and how and when it is repayable; (6) interest, if any; (7) security, if any, for the loan; (8) details of witnesses, if any; (9) place of giving loan, etc. and all other relevant details.

    You may get several sample formats for loan agreements on the Internet. Just Google it.

    Yes, you can charge interest on a friendly loan given by you and in fact, it depends on you. There is no legal bar in this regard.

    Please also note that under the provisions of the Income Tax Act, a loan of an amount exceeding Rs. 20,000 (twenty thousand) cannot be given in cash and similarly repayment of loan in cash above this monetary limit is also not permitted under law. So, loan (and its subsequent repayment) above this should be only through account payee cheque or bank draft or online transfer through bank, etc.

         


    Dr. Ashok Dhamija is a New Delhi based Supreme Court Advocate and author of law books. Read more about him by clicking here. List of his Forum Replies. List of his other articles.

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