Loan from directors of the conpany

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Dear Sir/Madam,

1. is there any restriction on loan taking from directors based on company networth?
2. can these loans be interest free ?
3. do we have to set any tenure for repayment ?
4. what are the documentations to maintain for loan?
Replies (2)
  1. Yes, there are restrictions on loan taking from directors based on the company's net worth.
  2. Yes, loans from directors can be interest-free. However, it is important to note that as per the Income Tax Act, 1961, interest-free loans from directors are considered as deemed income and may attract tax liability.
  3. There is no specific requirement to set a tenure for repayment of loans from directors, but it is recommended to have a clear repayment schedule agreed upon by both parties to avoid any confusion in the future.
  4. The documentation that should be maintained for loan from director includes:
  • A board resolution authorizing the loan
  • A loan agreement specifying the terms and conditions of the loan
  • A copy of the director's PAN and address proof
  • Any collateral security or guarantees provided
  • Any correspondence or communication related to the loan
  • Any repayment schedule or interest certificate, if applicable

 

As per the provisions of section 180 (1)(c) of the Companies Act 2013, a Company may borrow the money not exceeding its (Paid up share capital +Free Reserves +Securities Premium) except temporary Loan obtained from the Company's banker in ordinary course of business.

However pursuant to section 186(7), no Loan can be given under this section at a rate of interest lower then  the prevailing yield of one year, three years, five years, or ten years of government securities closest to the tenor of Loan.


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