How To Lend Money To Someone And Still Guarantee They Will Return It

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

The advice by Polonius, the main counsellor to Rex Claudius in Hamlet, had good reasoning rear it.

A loan to a family member or a friend is usually unsecured. The terms and conditions are undefined or hazy and demanding payback is difficult. And if the lend goes bad, the family relationship also sours. Moreover, such a loan is usually interest-free. This means you lose money.

So, to the highest degree people flinch from giving financial help to their fill up ones. Just what if you pull up a official document clear defining the terms and conditions of the loan? This way you can help your friend atomic number 3 well Eastern Samoa protect your interests .

There are two ways to do this - a promissory note and a detailed loan agreement .

"A speech act note is an acknowledgement to pay back debt (on demand Oregon otherwise) and may admit several simple terms and conditions. If the aim is to include specific Beaver State detailed clauses, it is advisable to enter into a lend agreement," says Gurmeet Singh Kainth, partner, D H Law Associates, a legal firm based in Mumbai.

Both are legally reasonable documents and are accepted by courts in slip there's a dispute.

DRAWING Rising THE Papers

If you wishing to living it simple and only for the record, go for a note, an unconditional promise past the borrower to pay a firm sum on demand operating theatre at a specified date.

This instrument comes under Section 4 of the Negotiable Instruments Act, 1881, and has to be gestural by the borrower. It is of different types-single/joint borrowers, collectable on demand, payable in instalments or every bit lump sum up, interest-bearing and interest-free.

Though the basic format is the similar, a few sentences are added or tweaked to deepen the terms and conditions.

Hope to Retribution: A sampling dedication note providing for sake and repayment in instalments

A hastate Google search will give you sample formats. Though non obligatory, it's amended to draw the note on a stamp paper and get it notarised. Any notary (special judicial officer) wish certify information technology for a small fee.

Loanword documents, withal, have to equal drawn on a stamp newspaper and notarised. They allow you put as many another clauses A you want, such as on collateral, default, termination and inclusion of legal heirs.

Be careful about the wording. Use inundated name calling (as they appear in identicalness proofs such as PAN/voter I-cards) and mention the date and place clearly.

Points such as tenure, periodicity (monthly, annually, oaf center or in instalments) of payments and how the pastime will be calculated (simple, compounded annually, etc) should be phrased clearly. Carry out the dealings through a banking company cheque and acknowledgment the cheque number in the agreement.

Unlike a promissory note, a lend agreement fanny be modified. An amendment clause needs to be incorporated in the concord. It enables the parties to amend the document on mutually-united terms and conditions. "Amendments can be carried out either through transcribed verification or a supplementary agreement," says Kainth of D H Law Associates.

There is no legal requirement but it is recommended to get the text file sign-language past a witness, sooner someone non correlative any of the two parties. This will sustain weightiness if on that point's a dispute.

TAX Tip over

Gifts from family members are not taxable, neither are the loans. But some gift above Rs 50,000 from a friend (non-relative or anyone who falls outside the definition of 'family' under the Income Tax Act) during a financial year is taxable. All the same, if it's a loan (with or without interest), it becomes tax-free.

So, if your friend gifts you Rs 60,000, you have to pay taxation on the amount, but if information technology is a loan that you testament be paying noncurrent, there wish be no tax thereon.

Interest-free loans are non-taxable for both lenders and borrowers. However, it becomes complex just in case there is a provision for payment of interest, as the lender will have to pay assess on the concern earned. "Whether the borrower has to pay tax on the interest group professional depends on the purpose of the loan. While, say, a loan taken to corrupt a house will exist eligible for tax subtraction under Section 24, you North Korean won't get some tax benefit if the money is for personal utilise," says Kuldip Kumar, executive director, tax and regulative services, PricewaterhouseCoopers India.

Also, not-institutional loans (from private individuals, including friends and crime syndicate members) are non eligible for tax deduction low-level Subdivision 80C. That is, you wish not be able to claim assess deduction on the principal. But then, unlike a friend, a bank leave never lend you without worry operating room at a dismiss.