# Loan Agreement Drafting

> A loan agreement records the amount, interest, repayment schedule, security and default terms. Tax rules matter as much as the contract: loans of ₹20,000 or more can't be taken or repaid in cash (Sections 269SS and 269T), interest is taxable to the lender, and a loan from a closely held company to a substantial shareholder can be taxed as deemed dividend. A private company can accept loans from directors and their relatives without breaching the deposit rules if the required declaration is given.

Practice: Legal Documents & Agreements — https://www.industax.com/services/legal-documents/

Undocumented family loans are a common trigger for scrutiny — the tax officer may treat unexplained credits as income. A simple agreement with bank transfers, interest terms (or a stated interest-free arrangement) and repayment records avoids that.

For company loans, we check the Companies Act deposit rules, Section 185 restrictions on loans to directors, and deemed-dividend exposure before money moves.

## Key facts

| Item | Detail |
| --- | --- |
| Cash limit | Loans of ₹20,000+ only through banking channels |
| Deemed dividend | Section 2(22)(e) for certain company loans to shareholders |
| Director loans to company | Allowed for private companies with declaration |
| Company loans to directors | Restricted under Section 185 |
| Interest | Taxable to lender; TDS may apply |

## Who needs this

- Families lending money to each other
- Directors funding their companies
- Friends and business partners lending informally

## What's included

- Loan agreement
- Tax and Companies Act review
- Repayment schedule
- Promissory note if required

## Documents

- Lender and borrower details
- Amount, interest and tenure
- Security details if any

## Process

1. **Review** — Tax and company-law checks.
2. **Draft** — Agreement prepared.
3. **Execute** — Stamped; funds moved by bank.

## FAQs

### Can I give an interest-free loan to a relative?

Yes. There's no tax on the borrower for an interest-free loan, but income earned by a spouse from money you lent can sometimes be clubbed with yours. Document it to explain the bank credits.

### Can a director lend money to their private company?

Yes. It isn't treated as a deposit if the director gives a written declaration that the money isn't borrowed from others, and the company discloses it in the board's report.

### What happens if a loan is taken in cash?

Taking a loan of ₹20,000 or more in cash attracts a penalty equal to the loan amount under the Income-tax Act.

## Official sources

- India Code — central Acts: https://www.indiacode.nic.in/

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Publisher: Indus Tax — CA-led tax and compliance firm (https://www.industax.com). Contact: info@industax.com, 9059139258.
This is general information, not advice for your specific facts.