Loan Agreement Format in India (With Sample)

A loan agreement records the terms on which one party lends money to another. India has no dedicated statute for loan agreements, so they are governed by the general law of contract under the Indian Contract Act, 1872, supplemented by State money lending legislation, the Usurious Loans Act, 1918, and the tax rules that restrict how loan money may move. To be enforceable, the agreement must identify the parties and the principal, state the rate of interest and the repayment schedule, define the events of default, and be stamped in accordance with the law of the State where it is executed.

The provision that catches lenders out is not in contract law at all. Section 269SS of the Income Tax Act, 1961 prohibits accepting a loan of twenty thousand rupees or more in cash, and the penalty is equal to the entire amount accepted.

Download the free loan agreement template in Word or PDF. All 16 clauses including the acceleration and default provisions, a repayment schedule, a security schedule, and a 9 point checklist covering the cash transaction limit.

What's inside

Loan Agreement, Promissory Note or Mortgage Deed: Which Document to Use

Clients often ask for the wrong instrument, usually because they have seen one before. These three do different work and are often used together.

Basis	Loan agreement	Promissory note	Mortgage deed
What it does	Records the full terms of the lending	Records an unconditional promise to pay	Creates security over immovable property
Governing law	Indian Contract Act, 1872	Negotiable Instruments Act, 1881	Transfer of Property Act, 1882
Length and detail	Detailed, with covenants and defaults	Short, often a single paragraph	Detailed, with the property schedule
Transferable	Only by assignment	Negotiable by endorsement	Assignable, subject to registration
Registration	Not compulsory	Not applicable	Compulsory for most mortgages
Stamp duty	Set by State schedule	Central rate, Union List instrument	Ad valorem on the secured amount
Typical use	Any substantial or structured loan	Small or informal advances, or alongside an agreement	Where land secures the debt

A well documented secured loan often uses all three: the agreement sets the terms, the promissory note gives a quick summary instrument, and the mortgage deed creates the security. The instrument that transfers an interest in land to secure repayment is the mortgage under the Transfer of Property Act, and choosing between its six statutory forms is a separate drafting decision from the loan itself.

Secured and Unsecured Loans: What Changes in the Drafting

The commercial difference is obvious. The drafting difference is where lenders lose money.

Unsecured loans

The lender has only a personal claim against the borrower. If the borrower has no assets, a judgment is worth nothing. Everything therefore turns on the strength of the covenants, the acceleration clause and, ideally, a personal guarantee from someone solvent.

Secured loans

The lender has recourse to a specific asset. Security may take several forms, and each is documented differently:

Mortgage over immovable property, created under Sections 58 to 104 of the Transfer of Property Act, 1882. A simple mortgage leaves possession with the borrower and gives the lender a right to cause the property to be sold on default, which is the most common form in private lending.
Hypothecation over movable assets such as stock or receivables, where possession stays with the borrower.
Pledge over movable property, where possession passes to the lender.
Assignment of receivables or of a policy.

Where the security is immovable property, the rights and liabilities of the mortgagor and mortgagee are largely supplied by statute, and a mortgage deed that contradicts them will not achieve what the drafter intended. Most importantly, the right of redemption cannot be clogged, so a clause preventing the borrower from redeeming the property on repayment is void.

Interest, Usury and the Limits on What a Lender Can Charge

There is no single national ceiling on interest, but three constraints operate.

The Usurious Loans Act, 1918 allows a court to reopen a transaction where the interest is excessive and the transaction substantially unfair, and to relieve the borrower of what it considers excessive.
State money lending legislation frequently caps rates and, more importantly, requires anyone carrying on the business of money lending to hold a licence. An unlicensed lender may find the loan unenforceable in some States.
Regulated lenders such as banks and NBFCs are subject to their regulator’s directions on rates and disclosure. Private individuals are not, but the first two constraints still apply.

Two drafting points follow. State the rate as an annual percentage, and say whether it is simple or compound and on what rests. And where a default interest rate is charged, keep the uplift modest and proportionate, because a penal rate is more likely to be read down than a compensatory one.

Tax Rules on Loan Transactions: Cash Limits and Penalties

This is where most privately drafted loan agreements go wrong, and the consequences are severe enough to dwarf anything in the contract itself.

Cash loans of twenty thousand rupees or more are prohibited

Section 269SS of the Income Tax Act prohibits accepting a loan, deposit or specified sum of twenty thousand rupees or more otherwise than by account payee cheque, account payee bank draft, or electronic transfer through a bank account. The threshold applies to the aggregate, so a series of smaller cash payments that together cross the limit is caught.

The penalty under Section 271D is a sum equal to the amount of the loan accepted. Not a fraction of it. The entire amount.

Repayment in cash is restricted in the same way

Section 269T applies the same restriction to repayment, and Section 271E imposes a penalty equal to the amount repaid.

The drafting consequence

Every loan agreement should state expressly that the principal will be disbursed and repaid only through banking channels, and should record the account details. This is not administrative detail. It is the clause that prevents a client from incurring a penalty equal to the entire loan while believing they have done nothing wrong.

Two further points arise in family and closely held company lending. Interest paid attracts deduction of tax at source in defined circumstances, and a loan by a closely held company to a substantial shareholder can be treated as a deemed dividend and taxed in the recipient’s hands. Both are reasons to take tax advice before documenting a loan within a group or a family.

Stamp Duty on a Loan Agreement

Stamp duty on a loan agreement is a State subject and varies considerably. Most States charge either a fixed amount or a percentage of the loan, often with a ceiling.

Three points matter more than the rate:

A promissory note is a Union List instrument, so its duty is fixed centrally rather than by the State. A loan documented by agreement and note therefore attracts two separate charges.
A mortgage deed attracts ad valorem duty on the secured amount, which is usually the largest cost in a secured transaction.
An unstamped agreement is inadmissible in evidence until the deficiency and penalty are paid, which is precisely the moment a lender discovers it, since the document is produced when the borrower has already defaulted.

Verify the current schedule for the State of execution before signing, since the general stamp duty position on agreements applies to loan documents as it does to every other instrument.

Clauses Every Loan Agreement Must Contain

Work through all sixteen. The ones that decide disputes are the events of default and the acceleration clause, and both are usually the shortest.

Parties. Full particulars including PAN, and for a company, the registered office and the authority of the signatory.
Principal amount. In figures and words.
Disbursement. When and how the money will be paid, and through which bank account. State that disbursement will be by banking channel only.
Purpose. What the loan may be used for. A purpose clause gives the lender a default trigger if the money is diverted.
Interest. The annual rate, whether simple or compound, the rests, and the date from which interest runs.
Repayment schedule. Instalment amounts and dates, or a single maturity date. Attach a schedule for anything other than a bullet repayment.
Prepayment. Whether the borrower may repay early, on what notice, and whether a prepayment charge applies.
Default interest. The uplifted rate on overdue amounts, kept proportionate.
Events of default. Non-payment, breach of covenant, insolvency, death, misrepresentation, and any cross default. Define each precisely rather than relying on a general reference to breach.
Acceleration. That on an event of default the entire outstanding balance becomes immediately due. Without this the lender must sue instalment by instalment.
Security. What is charged, how it is created, and the borrower’s obligation to execute further documents.
Guarantee. Whether a third party guarantees repayment, and on what terms. A guarantee should be a separate deed or a clearly separate covenant.
Representations and covenants. What the borrower asserts is true, and what they promise to do or refrain from doing during the term.
Indemnity. For costs of enforcement and for losses arising from breach. The interaction between the indemnity clause and any limitation of liability must be resolved expressly rather than left to inference.
Dispute resolution and jurisdiction. Named courts or an arbitration clause with the seat specified. Where the parties expect to preserve the relationship, mediation and arbitration differ in whether the outcome binds them, and the choice should be deliberate.
Notices, severability and governing law. These are the boilerplate clauses that are copied without thought and then determine where and how enforcement actually happens.

Sample Loan Agreement Format

A structural outline, not a completed document. Adapt to the transaction and the State.

LOAN AGREEMENT

This Agreement is made at ………… on this …… day of …………, 20……

BETWEEN [Name], aged ……, [relation] of …………, PAN …………, residing at ………… (the “Lender”)

AND [Name], aged ……, [relation] of …………, PAN …………, residing at ………… (the “Borrower”)

WHEREAS the Borrower has requested the Lender to advance a loan, and the Lender has agreed to do so on the terms set out below;

NOW IT IS AGREED AS FOLLOWS:

Loan amount. The Lender shall advance to the Borrower a sum of Rs. ………… (Rupees ………… only) (“the Loan”).

Disbursement. The Loan shall be disbursed on or before ………… by account payee cheque or electronic bank transfer to the Borrower’s account bearing number ………… at ………… Bank. No part of the Loan shall be paid or accepted in cash.

Purpose. The Loan shall be used solely for ………… and for no other purpose.

Interest. The Loan shall carry interest at ……% per annum, calculated on a [simple / compound] basis with [monthly / quarterly / annual] rests, accruing from the date of disbursement.

Repayment. The Borrower shall repay the Loan together with interest in …… equal instalments of Rs. ………… each, payable on the …… day of each month commencing …………, as set out in Schedule I. All repayments shall be made by electronic bank transfer or account payee cheque, and not in cash.

Prepayment. The Borrower may prepay the whole or part of the Loan on …… days’ written notice, [without charge / subject to a prepayment charge of ……%].

Default interest. Any amount not paid on its due date shall carry interest at ……% per annum from the due date until payment.

Events of default. Each of the following is an event of default: (a) failure to pay any amount within …… days of its due date; (b) breach of any covenant not remedied within …… days of written notice; (c) any representation proving untrue in a material respect; (d) insolvency, or any step towards winding up or bankruptcy; (e) any encumbrance being created over the Security without consent.

Acceleration. On the occurrence of an event of default, the entire outstanding principal together with accrued interest shall become immediately due and payable without further notice.

Security. The Loan is secured by ………… [describe], and the Borrower shall execute all documents necessary to create and perfect that security.

Representations. The Borrower represents that they have full capacity to enter into this Agreement, that the information furnished is true, and that no proceedings are pending which would affect their ability to repay.

Covenants. The Borrower shall not, without the Lender’s prior written consent, create any charge over the Security, or dispose of any material asset.

Indemnity. The Borrower shall indemnify the Lender against all costs and expenses, including reasonable legal fees, incurred in enforcing this Agreement.

Notices. Notices shall be in writing and sent to the addresses above, or such other address as notified in writing.

Dispute resolution. Any dispute shall be referred to arbitration by a sole arbitrator, the seat being ………… [OR: The courts at ………… shall have exclusive jurisdiction.]

Governing law. This Agreement is governed by the laws of India.

SCHEDULE I. Repayment schedule SCHEDULE II. Description of the Security

Lender: ………… Borrower: ………… Witness 1: ………… Witness 2: …………

Clauses 8 and 9 do the real work. A loan agreement without an acceleration clause forces the lender to sue for each missed instalment as it falls due, which is why so many private loans are never enforced at all. The same drafting failure appears in termination clauses in Indian contracts, which routinely state a right to terminate without stating what follows from it.

Six Mistakes That Make a Loan Agreement Unenforceable

Cash disbursement above the statutory limit. A penalty equal to the entire loan under Section 271D, before any question of recovery arises.
No acceleration clause. The lender cannot claim the whole outstanding balance on a single default.
Vague events of default. A general reference to breach leaves the lender arguing about whether a default has occurred at all.
Unstamped agreement. Inadmissible in evidence at the moment it is needed.
Security described but never created. A clause saying the loan “is secured by” property, with no mortgage deed executed and registered, creates nothing.
No written schedule. Oral variations to repayment terms are the most common factual dispute in private lending.

These are omissions rather than errors of expression, which is the consistent pattern across common mistakes made while drafting business contracts, and they are more damaging here because the document is only ever read once the relationship has broken down.

What Happens When a Borrower Defaults

Four routes, in the order they are usually attempted.

Demand and notice. The first formal step is a legal notice for recovery of money, which is where a precisely drafted repayment clause proves its value.
Cheque dishonour proceedings. Where repayment was by cheque and the cheque is returned unpaid, proceedings under Section 138 of the Negotiable Instruments Act may follow, and the process begins with a legal notice for cheque bounce served within the statutory period.
Civil recovery. A civil suit for recovery, or a summary suit where the claim is on a written contract for a liquidated sum. Limitation is generally three years from the date the loan becomes due, and an acknowledgment of debt in writing before expiry starts a fresh period.
Enforcement of security. Where the loan is secured, the lender enforces the mortgage or hypothecation. Where the borrower is a company in distress, insolvency and bankruptcy law displaces the ordinary order of recovery, and unsecured lenders rank behind secured creditors.

Learning to Draft a Loan Agreement Properly

A loan agreement is drafted when both parties are optimistic and read when one of them is not. Everything of value in it concerns the second moment: what counts as a default, how quickly the whole balance becomes payable, what the lender can seize, and whether the document can be produced in court at all.

The parts that require judgement rather than knowledge are the events of default and the security. Defining default too narrowly leaves a lender watching a borrower deteriorate with no trigger to act on. Defining it too widely produces an agreement no borrower will sign. That calibration is the difference between drafting and negotiating a contract, and it is a large part of the basic principles of legal drafting applied to a document with money at stake. Building it is most of what improving drafting skills means in commercial practice.

LawMento’s Practical Training in Drafting of Contracts covers loan agreements and security documents in Module 11, alongside 30 or more contract types across 26 hours and 230 pages of reading material. It builds on the foundation set out in contract drafting as a discipline, where the recurring lesson is that the clause nobody argues about at signature is the clause that decides the outcome.

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FAQs

Is a loan agreement legally valid without registration?

Yes. A loan agreement is not compulsorily registrable. It must be stamped in accordance with the State schedule to be admissible in evidence, but registration is required only where the document creates an interest in immovable property, such as a mortgage deed.

Can a loan be given in cash in India?

Not beyond twenty thousand rupees. Section 269SS prohibits accepting a loan of that amount or more otherwise than through banking channels, and Section 271D imposes a penalty equal to the entire amount accepted. Section 269T applies the same restriction to repayment.

What interest rate can a private lender charge?

There is no single national ceiling, but a court may reopen a transaction under the Usurious Loans Act, 1918 where the interest is excessive and the transaction substantially unfair. Several States also cap rates and require money lenders to be licensed.

Is a loan agreement on plain paper valid?

The contract may be valid, but an instrument chargeable with stamp duty that is not duly stamped is inadmissible in evidence until the deficiency and a penalty are paid. Execute it on the correct stamp value rather than fixing it later.

What is the difference between a loan agreement and a promissory note?

A loan agreement records the full terms including interest, repayment, security and default. A promissory note is a short negotiable instrument containing an unconditional promise to pay, governed by the Negotiable Instruments Act. They are frequently used together.

How long does a lender have to recover a loan?

Generally three years from the date the loan becomes due, under the Limitation Act, 1963. A written acknowledgment of the debt signed before the period expires starts a fresh three year period.

Does a loan agreement need witnesses?

Not as a matter of law for an ordinary agreement, but two witnesses are standard practice and make execution far easier to prove. Where the loan is secured by a mortgage, attestation by two witnesses is required.

Can a loan agreement between family members be enforced?

Yes, provided the elements of a contract are present and the agreement is properly documented and stamped. Family loans fail most often because they were undocumented, paid in cash, or repaid informally without records. Where the money is not intended to be repaid at all, the correct instrument is a gift deed, which carries entirely different tax and stamp duty consequences.

This guide explains the general framework and is not legal advice for any specific transaction. Stamp duty rates, State money lending requirements and tax thresholds vary and change over time. Verify the current position for the relevant State, and take tax advice separately, before documenting any loan.