Interest Free Loan from Director

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Vikash (Querist)
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07 July 2011 Dear Experts

Please inform whether A director of a Private Limited company can give interest free loan to the company or not?

If interest to be charged whether TDS will also be applicable, if yes, at what rate?

Regards
Vikash

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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07 July 2011 Yes provided the articles of association do not contain a prohibitory clause. Also, the company should obtain a declaration from the director stating that the money given to the company is not a borrowed amount.
TDS provisions attracts under section 194A of the income tax act,1961. Rate is 10%.

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Vikash

Vikash (Querist)
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07 July 2011 Dear MR. B Chackrapani

Please re-confirm Can a director give INTEREST FREE loan to the company?

Thanks & Regards
Vikash

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 Yes, a director can give an interest-free loan to a company, but there are several considerations and implications that need to be addressed:

### Legal Considerations

1. **Company Law**:
- **Companies Act, 2013**: There is no specific prohibition under the Companies Act, 2013, against a director giving an interest-free loan to the company. However, any such transaction must comply with the provisions related to related party transactions and disclosure requirements.

2. **Board Approval**:
- The loan must be approved by the Board of Directors. The terms of the loan, including the fact that it is interest-free, should be clearly documented in the board resolution.

3. **Disclosure Requirements**:
- The company must disclose the loan in its financial statements and annual return. As per Section 189 of the Companies Act, 2013, the company must maintain a register of loans, guarantees, security, and acquisitions made by the company.

### Tax Considerations

1. **Tax Implications for the Director**:
- There are no specific tax implications for the director for providing an interest-free loan to the company, as long as it is a genuine loan and not disguised remuneration or a benefit.

2. **Tax Implications for the Company**:
- The company should ensure that the loan is not re-characterized by tax authorities as income or deemed dividend, especially in cases where the company has substantial reserves and the director is a major shareholder.

### Practical Considerations

1. **Documentation**:
- Proper documentation is essential. A loan agreement should be executed between the director and the company specifying the terms of the loan, even if it is interest-free.

2. **Company's Financial Health**:
- Providing an interest-free loan could be a way to support the company’s cash flow needs without adding to its interest burden. However, the company should ensure that such loans are used appropriately and are in line with its financial strategy.

3. **Corporate Governance**:
- Good corporate governance practices require transparency and proper documentation of all financial transactions, including loans from directors.

### Example

**Scenario**:
- Mr. X is a director of ABC Pvt Ltd. The company is in need of funds for working capital and Mr. X decides to provide an interest-free loan of ₹10,00,000.

**Steps to Follow**:

1. **Board Meeting and Resolution**:
- The Board of Directors of ABC Pvt Ltd convenes a meeting and passes a resolution to accept the interest-free loan from Mr. X.

2. **Loan Agreement**:
- A loan agreement is drafted and signed by both Mr. X and ABC Pvt Ltd, detailing the terms of the loan, including the fact that it is interest-free and the repayment schedule.

3. **Disclosure in Financial Statements**:
- ABC Pvt Ltd discloses the loan in its financial statements under the section of related party transactions.

4. **Register of Loans**:
- The company updates its register of loans as required under Section 189 of the Companies Act, 2013.

### Conclusion

Yes, a director can give an interest-free loan to the company, provided it complies with the legal, tax, and disclosure requirements. Proper documentation and transparency are key to ensuring that the transaction is compliant and does not attract any adverse implications. For specific advice and to ensure compliance with all applicable laws, it is advisable to consult with a legal or financial advisor.