Most of what goes wrong with a private loan in India happens before there is any dispute — in how the money moved. A cash loan of twenty thousand rupees or more can attract a penalty equal to the entire loan, and another one if it is repaid in cash. That is on this page before anything else, because it is the mistake families make most and the one no format on the internet warns you about.
Section 269SS of the Income Tax Act: no person shall take or accept any loan or deposit or specified sum "otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account" where the amount is ₹20,000 or more.
Section 269T applies the same restriction to repayment.
Sections 271D and 271E: the penalty is "equal to the amount of loan or deposit taken or accepted or repaid".
So a ₹5,00,000 loan handed over in cash exposes the taker to a ₹5,00,000 penalty. Repay it in cash and there is another. The penalty is not a percentage. It is the whole amount.
We put this at the very top rather than in a footnote because of who reads this page. The person searching for a loan agreement format is usually about to lend to a relative, a friend or a small business, and in a great many of those the money is about to change hands in cash because that is what everybody has always done.
The fix costs nothing and takes a minute:
The bonus is evidential, and it is large. A borrower who denies the loan has to explain a bank transfer from your account to theirs. A borrower denying a cash loan has to explain nothing at all. The rule that exists for tax reasons happens to hand you the best evidence you will ever have.
There are exemptions in the sections — government, banking companies, post office savings banks, cooperative banks, corporations established by a central or state Act, and government companies. Unless you are one of those, assume the rule applies to you. And because tax treatment depends on facts, check your own position with your accountant rather than with a web page.
Transfer it instead, and tell us the amount and the parties. We will draft the agreement around the transfer so the money and the document support each other. Nothing payable in advance.
The commonest arrangement in a private loan is a handshake and a blank or post-dated cheque. People believe the cheque is the security. It is a remedy — a very good one — but it is not proof that you lent anything.
Section 138, The Negotiable Instruments Act, 1881
The section applies "where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid" for insufficiency of funds or because it exceeds the arrangement.
Explanation — "'debt or other liability' means a legally enforceable debt or other liability."
Source linked at the foot of this page.
Read the Explanation twice. The cheque is only an offence if it was given for a legally enforceable debt. So the moment the borrower says "that cheque was security for something else", or "I never took any loan", the question in the case becomes: was there a debt?
That is what the agreement is for, and why the two documents belong together.
The agreement proves the debt — who lent, how much, when, on what terms.
The bank transfer corroborates it independently.
The cheque gives you a fast and uncomfortable remedy if it is not repaid.
Take all three. Each covers what the others do not.
If a cheque bounces, the criminal remedy exists — but it is hedged with three timing conditions, and missing any one of them ends the case before it starts. More Section 138 complaints fail on these dates than on the merits.
Section 138, The Negotiable Instruments Act, 1881
(a) "the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier"
(b) "the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information" of the dishonour
(c) "the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice"
The punishment: imprisonment "for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both".
Source linked at the foot of this page.
| Step | The clock | What kills it |
|---|---|---|
| Presenting the cheque | Within six months of its date, or its validity period, whichever is earlier. | A post-dated cheque forgotten in a drawer. Validity runs from the date written on it. |
| The written demand | Within thirty days of receiving information of the dishonour. | Waiting to see whether the borrower pays voluntarily. The thirty days run whether you wait or not. |
| The drawer's fifteen days | The drawer has fifteen days from receiving the notice to pay. | Filing the complaint before those fifteen days are over — premature, and liable to be dismissed. |
| Filing the complaint | Within one month of the cause of action arising — that is, after the fifteen days expire. | Filing late. The cause of action arises on a fixed day and the window is short. |
The two mistakes we see most. First, sending the notice by ordinary post or over a messaging app, so there is no proof of when it was received — and the whole scheme turns on dates of receipt. Send it by registered post with acknowledgment due, and keep the tracking record and the acknowledgment.
Second, filing the complaint before the drawer's fifteen days have run out. Impatience there is fatal, and the delay is only a fortnight.
A properly drafted legal notice is the hinge of the whole process. It has to identify the cheque, the amount, the dishonour, the debt it was given for, and make an express demand for payment within fifteen days — and it has to go out inside thirty days.
A cheque case takes time, and the old complaint was that a borrower could use the delay as a strategy. The 2018 amendment addressed that.
Section 143A, The Negotiable Instruments Act, 1881 (inserted by Act 20 of 2018)
"The Court trying an offence under section 138 may order the drawer of the cheque to pay interim compensation to the complainant"
"The interim compensation under sub-section (1) shall not exceed twenty per cent. of the amount of the cheque."
"The interim compensation shall be paid within sixty days from the date of the order … or within such further period not exceeding thirty days"
And if the drawer is acquitted, the court directs the complainant to repay the interim compensation with interest at the bank rate.
Source linked at the foot of this page.
Note the word may. Interim compensation is a power the court exercises on the facts, not an entitlement that follows filing. It is also repayable with interest on an acquittal, which is the balance the provision strikes. Ask for it; do not count on it.
Broadly, a suit to recover money lent must be brought within three years, running from the date the loan was made unless the terms fix a different date for repayment. That second half is why the repayment date in the agreement matters so much: where a date is fixed, time runs from it; where nothing is fixed, it runs from the loan.
So the most damaging clause in a family loan is the kindest one. "To be repaid whenever you can" sounds generous and leaves nobody able to say when limitation began. Put a date in, even a distant one. You can always choose not to enforce it.
And if three years have already passed, there is a route back that very few people know about.
Section 25(3), The Indian Contract Act, 1872
An agreement made without consideration is void — except, among other cases, where:
"It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits."
Where those conditions are met, "such an agreement is a contract".
Source linked at the foot of this page.
What that means practically. A fresh promise to pay, in writing and signed by the borrower, creates a fresh, enforceable contract — even though a suit on the original loan was already barred.
But it must be a promise to pay, not merely an acknowledgment of the amount. "Yes, I owe you three lakh" is an admission. "I will pay you three lakh" is a promise. The difference decides the case, and it is a difference of one word that most people get wrong when they draft such a letter themselves.
Which is why, on an old debt, the first useful step is usually a legal notice — not because it recovers the money, but because of what it often produces in reply.
Send us what you have — transfers, messages, part-payments, names. We will tell you honestly whether it is recoverable and what the first step is. That assessment costs nothing.
Full names, father's names, addresses and PAN of both lender and borrower. PAN matters here — the transaction is one the tax authorities may look at, and identifying both sides properly is part of keeping it clean.
And the date it was or will be advanced. If it is being advanced in tranches, each tranche with its date.
The UTR or cheque number, the date, and the accounts. This is the clause that does the most work if the loan is ever denied, and it is the clause most templates leave out entirely.
Brief, but state it. A loan for a stated purpose that was used for something else is a different conversation from a general advance, and in a business loan it can matter a great deal.
Simple or compound, the periodicity, from what date it runs, and whether it is paid separately or added. "Twelve per cent" without a basis is an argument waiting to happen.
A single date, or instalments with amounts and dates, and the mode of repayment. This clause fixes when limitation starts and when default occurs, so it carries more weight than any other.
What counts as default, whether there is a grace period, whether the whole amount becomes payable at once on a missed instalment, and the rate of interest on overdue sums.
Whether the borrower may repay early, with or without notice, and how interest is adjusted. In a friendly loan this is usually a kindness; in a commercial one it is a negotiation.
What is charged, in whose favour, and the documents creating it. Where immovable property is involved, see the section below — the document you need may not be this one.
Identified and signing the agreement, with the extent of the guarantee stated — the whole debt or a part, and for what period. A guarantor who signs as a witness has guaranteed nothing.
Listed with numbers, dates and bank, and stated to be given towards the repayment of this debt — which is the language that connects them to the "legally enforceable debt" in Section 138.
Which courts, or arbitration, and where. Agreeing this at the start avoids a fight about the forum on top of the fight about the money.
Parties may agree a rate. Two things temper that in practice, and both are worth knowing before you write a large number into the agreement.
The practical rule we give clients: pick a rate you would be comfortable reading aloud to a judge, state the basis clearly, and put a separate, modest default rate on overdue amounts. A clear twelve per cent that gets enforced beats a disputed thirty-six per cent that does not.
| Type | What you get | The document you need |
|---|---|---|
| Plain unsecured | A contractual right to be repaid, and the cheque remedy if cheques were given. | A loan agreement on stamp paper. No registration. |
| With a guarantor | A second person to proceed against. Only as good as that person. | The guarantee within the agreement or as a separate deed, signed by the guarantor as guarantor — not as a witness. |
| Secured on movables | A charge over goods, shares, a vehicle or equipment. | A hypothecation or pledge document, and the charge noted wherever it must be — for a vehicle, on the registration certificate. |
| Secured on immovable property | The strongest position, and the most formality. | A mortgage — which generally requires a registered instrument. A loan agreement that merely mentions a property does not create a mortgage. |
The dangerous middle. A very common arrangement is a loan with the borrower's title documents handed over and nothing registered. People believe they have security. Whether anything has been created, and what, depends on the facts and the law of that state — and it is not something to assume in your favour.
If property is meant to be security, say so at the outset and let us tell you which document does it. Our title verification guide and sale deed guide deal with the checks that belong alongside.
Most of the private loans we document are between relatives, and they fail in a pattern that is almost boringly consistent.
What we tell people to say, because it works. Not "I don't trust you" — but "let's write it down so that if anything happens to either of us, nobody is left guessing." That is true, it is the real reason, and in our experience nobody has ever objected to it.
The death point is not theoretical. An undocumented loan disappears with the lender and becomes an unpleasant surprise for the borrower's family. A documented one is simply an asset and a liability that everyone can see. Our will drafting guide covers the other side of the same problem.
| Item | Who charges it | What to expect |
|---|---|---|
| Our drafting charge | Us | From ₹900, 1 – 2 days, payable after the work. |
| Stamp paper | State government | At the state's rate for an agreement of this kind; some states use a slab based on the amount. Quoted before drafting, paid at actuals. |
| Notary | Notary | At the notary's rate, where the parties want it attested. |
| Registration | Sub-registrar | Not required for a plain unsecured loan agreement. Required where a mortgage of immovable property is being created — a different document and a different cost. |
| Legal notice on default | Us | Quoted on our legal notice page. Registered post with acknowledgment due is a few rupees and is not optional. |
| Court fee on a recovery suit | The court | Ad valorem on the amount claimed, at the state's rate. |
| Advocate | The advocate | Engaged by you directly on terms settled between you. We do not quote, collect or publish an advocate's fee. |
Two standing promises. You pay nothing in advance — placing the order is free and payment comes after the work. And we do not draft a document we know to be wrong for you, which here means we will tell you when what you actually need is a registered mortgage rather than a loan agreement with a property mentioned in it.
Those two things in that order protect a private loan better than any clause we can write. Tell us the amount, the parties and the terms, and we will do the rest. Nothing payable in advance.
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