Lending Money to Friends and Family: Rules That Protect You

Before lending money to friends or family, decide whether you can afford never to see it again. If you can, lend by bank transfer, write down the amount and repayment plan, and agree on what happens if a payment is missed. If you cannot, it is usually kinder to give a smaller amount as a gift or help in another way, because an unpaid loan can cost you both the money and the relationship.

Ask these four questions first

1. Can I afford to lose it? The loan should come from surplus savings, not from your emergency fund or money set aside for EMIs, rent or school fees.
2. Why are they not borrowing from a bank? If a bank or NBFC turned them down, ask why. Repeated rejections, many active loans or a settled account on their credit report are warning signs.
3. What is the money for? A medical bill or a deposit for a new job is different from covering another loan's EMI or a trading loss. Lending to repay other debt often only delays the problem.
4. How will I feel if repayment is late? If the answer is "angry", reduce the amount.

Loan, gift or help in another way

Being a guarantor is often riskier than lending outright, because you can be pursued for the full outstanding loan plus charges. Read co-applicant and guarantor liability before signing. Gift tax rules for different relations are in tax on gifts.

How to document a personal loan

A short written agreement protects both of you. It does not need to be complicated. Include:

• Names, addresses and PAN of lender and borrower
• Loan amount and the date and mode of transfer (with UTR or transaction reference)
• Interest rate, if any, or a clear statement that the loan is interest-free
• Repayment schedule: amount, due date and method
• What happens on a missed payment (for example, a grace period, then a revised plan)
• Signatures of both parties and, ideally, two witnesses

Many people also take a promissory note signed by the borrower. Stamp duty on agreements and promissory notes is set by each state, so check your state's current rate or use an e-stamp paper; an unstamped or under-stamped document can face problems as evidence until the deficit and penalty are paid.

Post-dated cheques for repayment instalments are common. If such a cheque bounces for insufficient funds, Section 138 of the Negotiable Instruments Act, 1881 can apply.

Cash limits: always use the bank

As of October 2026, under the Income-tax Act, 2025:

• Section 185 (old Section 269SS): a borrower generally cannot accept a loan of ₹20,000 or more in cash. The penalty can equal the amount accepted.
• Repayment of such loans of ₹20,000 or more must also be made through banking channels (old Section 269T).
• Section 186 (old Section 269ST): no one may receive ₹2 lakh or more in cash from one person in a day, in one transaction, or for one event.

UPI, NEFT, IMPS and account payee cheques all create a record that proves the loan existed. That record is your strongest evidence if you ever need to recover the money.

Worked example: structuring a ₹2 lakh loan

Your cousin needs ₹2 lakh for a medical bill and expects to repay over 12 months.

Option A: interest-free. Monthly repayment = ₹2,00,000 ÷ 12 = ₹16,667 (rounded).

Option B: 8% a year, as an EMI. Using the standard EMI formula with a monthly rate of 8% ÷ 12:

• EMI ≈ ₹17,398
• Total repaid ≈ ₹17,398 × 12 = ₹2,08,772 (about ₹8,772 interest)

You can check this on the EMI calculator.

Your opportunity cost. If the ₹2 lakh had stayed in a bank FD at about 7%, it would have earned roughly ₹14,000 in a year (₹2,00,000 × 7%, simple interest, before tax). In Option A you give up that interest; in Option B you recover part of it, and the ₹8,772 is taxable in your hands at your slab rate.

Tax side. Interest received is income from other sources. The borrower generally cannot claim a tax deduction for this interest unless the money was used for a purpose that allows it, such as a home loan for their house, and they will need proper documentation for that.

What to do if they do not repay

Act early, calmly and in writing.

1. Send a friendly written reminder on WhatsApp or email, referring to the agreement and the missed date.
2. Offer a revised schedule if their situation has genuinely changed. Smaller instalments recovered are better than nothing.
3. Send a formal legal notice through a lawyer if reminders are ignored. This often prompts payment.
4. If a cheque bounced: under Section 138, you generally have 30 days from learning of the dishonour to send a written demand notice. The borrower then has 15 days to pay. If they do not, a complaint can be filed within one month after that period ends. The court can impose imprisonment of up to two years, a fine up to twice the cheque amount, or both.
5. Civil recovery suit: for a loan without a bounced cheque, you can file a money recovery suit. Under the Limitation Act, 1963, the period is generally three years from when the loan became repayable, and a written acknowledgment of the debt by the borrower before that period ends can restart the clock.
6. Mediation: community or court-annexed mediation can be faster and less damaging to family ties.

The timelines above are general. For a specific case, consult a lawyer.

What not to do

• Do not lend cash amounts of ₹20,000 or more; use the bank.
• Do not break your FDs, SIPs or emergency fund to lend.
• Do not take a personal loan or use your credit card to lend money to someone else.
• Do not lend to cover gambling, speculative trading or "guaranteed return" schemes.
• Do not keep lending to someone who has not repaid the last loan.
• Do not discuss the loan in front of other relatives to shame the borrower; it rarely speeds up repayment.

Setting a personal lending policy

Decide your rules in advance so you are not deciding under emotional pressure:

• A yearly cap on total lending, for example 5% of your annual savings
• A per-person cap
• Written agreement for anything above an amount you choose, such as ₹25,000
• No new loan until the previous one is repaid

For a broader framework on helping relatives without hurting your own goals, see financial boundaries when supporting relatives.

Key takeaways

• Lend only what you could afford to lose, and never from your emergency fund or borrowed money.
• Document every loan: amount, schedule, interest and signatures, with the transfer made through a bank.
• As of October 2026, loans of ₹20,000 or more cannot be accepted or repaid in cash (Section 185, old 269SS; repayment rules from old 269T).
• Interest you receive is taxable; gifts from relatives are tax-free for the receiver.
• If a repayment cheque bounces, Section 138 timelines are short; a civil suit is generally possible within three years.