Loan Agreement: Draft It Before the Money Moves
A loan agreement records who lent what, at what interest, repayable when, and what happens on default. We draft it for your review, take you through e-stamping on the Haryana e-GRAS portal and align it with the Companies Act and Income-tax rules when a company is on either side.
What it is
A loan agreement is a written contract between a lender and a borrower. It names the parties, the principal, the interest rate, the repayment dates, the consequences of default and any security or guarantee. Without it, your only proof is a bank entry, and a bank entry does not record what was agreed.
The contract is governed by the Indian Contract Act, 1872, including Section 74 on compensation up to a named sum. The Indian Stamp Act, 1899 decides whether it is admissible in evidence. When a company is involved, the Companies Act, 2013 and the Income-tax law add their own rules, covered below.
Who it applies to
Private lender and borrower
Friends, relatives, business partners or a founder lending to a startup. Say a Ballabgarh trader lends money to a supplier to clear stock. Six months on, the supplier calls it an advance against supplies. A written agreement ends that argument before it starts.
A company borrowing from a director or member
Directors often fund a private company in its early years. The loan needs a clean paper trail and a written declaration that the money is not itself borrowed. It is then reported each year in Form DPT-3.
A company lending to another party
Section 185 bars loans to directors, their relatives and firms where they are partners, unless a special resolution and the listed conditions are met. Check before you sign.
Why it matters
Proof of the debt and its terms
A signed, stamped agreement fixes the amount, interest and due dates. It settles whether the money was a loan, a gift or capital.
Interest courts will respect
India has no single national interest cap for private lenders, but courts can reopen excessive interest under the Usurious Loans Act, 1918. Here is the catch: a higher rate is not safer. If the agreement is silent on interest, the court decides under Section 34 of the CPC.
Tax and books stay clean
Loans and repayments of ₹20,000 or more must go by account payee cheque, draft or electronic transfer. A cash breach attracts a penalty equal to the amount, and the rule carries into the Income-tax Act, 2025 under a new section number.
Documents required
From both parties
- PAN and address proof
- Bank account details for disbursement and repayment
- For a company: CIN, board resolution and authorised signatory
About the loan
- Amount, date, purpose and interest rate
- Repayment schedule and prepayment terms
- Security, guarantee or post-dated cheques, if any
Support papers
- Director’s written declaration for a director loan
- Special resolution where Section 185 applies
- Bank statement proving disbursement
How it works
Fix the commercial terms
Agree the amount, rate, tenure and repayment pattern first. We flag anything unusual, such as a bullet repayment or an interest-free period.
Draft the agreement
We prepare the clauses: parties, principal, interest, repayment, default and acceleration, security, governing law and witnesses. You review and mark changes.
Stamp and sign
We guide you to generate e-stamp paper on the e-GRAS portal against a GRN. Stamp before or at signing, as Section 17 of the Stamp Act requires.
Disburse and record
Pay by bank transfer and quote the UTR in the agreement. For companies, we update the books and take the loan into the annual DPT-3 return. If a post-dated cheque later bounces, a cheque bounce notice starts the clock.
Timelines
Drafting
Usually one to two working days after the terms are fixed, longer if security documents are involved.
Recovery period
A loan claim is generally time-barred after three years. A fresh written, signed acknowledgement under Section 18 of the Limitation Act, 1963 restarts the clock. An oral one does not.
Company reporting
Form DPT-3 is due by 30 June each year, with information as on 31 March, and includes director loans.
What happens if the paperwork is wrong
An unstamped agreement
Under Section 35 of the Stamp Act, an instrument that is not duly stamped is not admitted in evidence until duty and a penalty of up to ten times the shortfall are paid.
A cash loan
Accepting a cash loan of ₹20,000 or more can draw a penalty equal to the amount received. Reasonable cause may save you, but ignorance of the rule does not.
A time-barred claim
Let three years pass with no written acknowledgement or suit, and the court can refuse to enforce the debt.
Frequently asked questions
Do I need a loan agreement for a loan to a relative?
Yes, write it down even for family. The law does not forbid an oral loan, but you would have to prove the amount, rate and due date from memory and bank entries. A short, stamped agreement fixes all three. It also helps both sides show the money was a loan and not a gift, which matters for tax and for the books.
Does a loan agreement need stamp paper?
Yes. Stamp duty on loan agreements is a state matter, so the rate depends on where you sign. In Haryana you generate e-stamp paper against a GRN on the e-GRAS portal. An unstamped agreement is not admitted in evidence until duty and a penalty are paid, so stamp it before or at signing.
Can I lend or repay in cash?
Not at ₹20,000 or more. Loans, deposits and their repayments at that level must go by account payee cheque, bank draft or electronic transfer. The penalty for cash is an amount equal to the sum involved. Use a bank transfer, quote the UTR in the agreement and keep the statement. It protects both sides.
Can a company take a loan from its director?
Yes, a private company can, usually without it counting as a public deposit. The director gives a written declaration that the money is not borrowed from someone else, and the company reports it in Form DPT-3 by 30 June each year. We prepare the declaration, the agreement and the board approval together.
Can a company lend money to its director?
Only within Section 185. The company cannot lend directly or indirectly to a director, a relative or a firm in which a director is a partner, except as the section allows. Lending to a connected entity needs a special resolution and use for its principal business. A breach carries a fine of ₹5 lakh to ₹25 lakh.
What interest rate can I charge?
There is no single national cap for private lenders, but courts can reopen interest they find excessive under the Usurious Loans Act, 1918. Many states also regulate people who lend as a business. Choose a rate that fits the risk, state it clearly, and say whether it is simple or compounded.
What if the borrower stops paying?
Start with a written demand. If a cheque bounces, Section 138 of the NI Act applies: the demand notice must go within 30 days of the bank’s return memo, and the drawer then has 15 days to pay. For commercial disputes, pre-institution mediation under Section 12A may come first. Our legal notice service handles the paperwork, with a practising advocate signing.
How long do I have to recover a loan?
Generally three years. The clock restarts only when the borrower acknowledges the debt in writing, signed, before it expires, as Section 18 of the Limitation Act provides. Keep a diary of due dates, ask for a written acknowledgement if repayment slips, and do not wait until year three to act.
What it costs
Our fee plus the government fee that applies to your case, quoted before you commit. Tell us the situation and we will price it exactly.
Government costs are limited to stamp duty, which varies by state, and, for companies reporting loans, the Form DPT-3 fee of ₹200 to ₹600 depending on share capital. There is no fee to register the agreement itself.
Ready to begin?
Tell us who is lending, how much and on what terms. We will draft, stamp-guide and record it, and quote the cost before you commit.