What Agreement You Should Do While Giving Money To Someone In India

"Neither a borrower nor a lender be; for loan oft loses both itself and friend."

The advice by Polonius, the primary counsellor to King Claudius in Hamlet, had expert reasoning behind it.

A loan to a family fellow member or a friend is usually unsecured. The terms and conditions are undefined or hazy and demanding payback is hard. And if the loan goes bad, the human relationship also sours. Moreover, such a loan is usually involvement-free. This ways you lose coin.

And then, almost people blanch from giving fiscal help to their shut ones. But what if you draw up a legal document clearly defining the terms and conditions of the loan? This fashion yous can help your friend as well as protect your interests .

In that location are two ways to do this - a promissory note and a detailed loan agreement .

"A promissory note is an acknowledgement to pay back debt (on demand or otherwise) and may include some simple terms and conditions. If the aim is to include specific or detailed clauses, it is advisable to enter into a loan agreement," says Gurmeet Singh Kainth, partner, D H Police Associates, a legal house based in Mumbai.

Both are legally valid documents and are accepted past courts in case in that location's a dispute.

DRAWING UP THE Certificate

If yous want to continue information technology simple and only for the record, get for a promissory notation, an unconditional promise by the borrower to pay a stock-still sum on need or at a specified date.

This instrument comes under Section 4 of the Negotiable Instruments Act, 1881, and has to be signed by the borrower. It is of different types-single/articulation borrowers, payable on demand, payable in instalments or as lump sum, interest-bearing and involvement-free.

Though the basic format is the aforementioned, a few sentences are added or tweaked to change the terms and weather.

Promise to Payback: A sample promissory notation providing for involvement and repayment in instalments

A elementary Google search will give you sample formats. Though not mandatory, it'south better to describe the note on a postage paper and get it notarised. Whatever notary (special judicial officer) volition attest it for a small-scale fee.

Loan documents, however, have to exist drawn on a stamp paper and notarised. They let you put as many clauses as you want, such as on collateral, default, termination and inclusion of legal heirs.

Exist careful about the wording. Apply full names (as they appear in identity proofs such as PAN/voter I-cards) and mention the appointment and place clearly.

Points such as tenure, periodicity (monthly, annually, lump sum or in instalments) of payments and how the interest volition be calculated (simple, compounded annually, etc) should be phrased clearly. Carry out the transaction through a depository financial institution check and mention the check number in the agreement.

Unlike a promissory note, a loan understanding tin be modified. An amendment clause needs to be incorporated in the agreement. It enables the parties to amend the certificate on mutually-agreed terms and conditions. "Amendments tin exist carried out either through written confirmation or a supplementary agreement," says Kainth of D H Law Assembly.

There is no legal requirement just it is advisable to get the document signed by a witness, preferably someone not related to whatever of the two parties. This will hold weight if there'south a dispute.

TAX Angle

Gifts from family unit members are non taxable, neither are the loans. But any gift higher up Rs 50,000 from a friend (non-relative or anyone who falls outside the definition of 'family' under the Income Taxation Human action) during a financial year is taxable. Even so, if it's a loan (with or without involvement), it becomes taxation-gratis.

Then, if your friend gifts you Rs sixty,000, you have to pay tax on the amount, but if it is a loan that you lot will be paying dorsum, there will be no revenue enhancement on it.

Involvement-gratuitous loans are non-taxable for both lenders and borrowers. However, it becomes complicated in instance there is a provision for payment of interest, as the lender will have to pay tax on the interest earned. "Whether the borrower has to pay tax on the interest paid depends on the purpose of the loan. While, say, a loan taken to buy a house will exist eligible for tax deduction under Department 24, you won't get any taxation benefit if the money is for personal use," says Kuldip Kumar, executive manager, tax and regulatory services, PricewaterhouseCoopers India.

Also, non-institutional loans (from private individuals, including friends and family members) are not eligible for tax deduction nether Department 80C. That is, you will not be able to merits tax deduction on the chief. But then, unlike a friend, a banking concern volition never lend you without involvement or at a disbelieve.