Promissory Note or Loan Agreement: Which to Use for a Personal Loan

For a simple loan between individuals, a promissory note is the quickest record: a signed, unconditional promise by the borrower to pay a fixed sum to the lender. It is cheap to stamp because the duty is fixed by the Union, and it is good evidence of the debt. A loan agreement does more work. It records the interest, repayment schedule, security, guarantor and what happens on default, but it is stamped under State law and costs more. For anything beyond a small, short loan, many lenders use both: a loan agreement for the terms and a promissory note signed at the same time as clean proof of the debt.

Whichever document you use, pay the money through a bank account and not in cash if the amount is Rs 20,000 or more. The Income-tax Act, 2025 penalises the person who takes such a loan in cash, and a bank trail is also the best evidence that the money was actually lent.

What a promissory note is in law

Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as an instrument in writing (not a bank note or currency note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer. The illustrations to the section show the difference in practice. "I promise to pay B or order Rs. 500." is a promissory note. "Mr. B. I.O.U. Rs. 1,000." is not, because it only acknowledges a debt without promising to pay it. A promise to pay "seven days after my marriage with C" is not one either, because it depends on an uncertain event.

Three practical consequences follow:

• Keep it unconditional. Do not add terms like "if my business makes a profit". Put conditions in a separate loan agreement.
• Name the lender. Section 31 of the Reserve Bank of India Act, 1934 says that no person other than the RBI (or the Central Government where the Act authorises it) can make or issue a promissory note payable to the bearer. A personal promissory note should be payable to a named person or to that person's order.
• State a certain sum. A note promising to pay a fixed amount "and all other sums which shall be due" does not qualify, as illustration (d) to section 4 shows. Interest can be stated, but the principal must be certain.

Stamp duty on a promissory note

Stamp duty on most documents is a State subject, and rates differ widely. Promissory notes are an exception. Entry 91 of the Union List in the Seventh Schedule to the Constitution reserves to Parliament the rates of stamp duty on bills of exchange, cheques and promissory notes, among others. The rate is set in Article 49 of Schedule I to the Indian Stamp Act, 1899, and is the same across India. For a note payable otherwise than on demand, Article 49(b) fixes the duty at one-fifth of the duty on a bill of exchange of the same amount payable otherwise than on demand. Check the current Schedule I rate when you prepare the note.

Stamp the note when it is signed. Section 35 of the Stamp Act says an instrument chargeable with duty that is not duly stamped cannot be admitted in evidence or acted upon. Rules on whether and how a defective instrument can later be cured, and at what penalty, have been amended over the years and are not uniform, so it is not worth taking the risk.

What a loan agreement adds

A promissory note proves the debt but says nothing else. A loan agreement or a personal loan agreement covers the terms that cause most disputes later:

• the amount, the date and mode of disbursement, and the bank accounts used;
• interest, if any, how it is calculated and when it is paid;
• the repayment schedule, prepayment rights and any grace period;
• security offered, such as a pledge of jewellery or a post-dated cheque, and what happens to it on repayment;
• a guarantor, if one is joining, and the guarantor's liability;
• events of default and the lender's right to demand the full balance at once;
• how notices are to be given, and which courts will have jurisdiction.

A loan agreement is stamped under the stamp law of the State where it is signed, usually as an agreement or under a specific loan or bond article. The duty differs by State, so check the State schedule before printing or e-stamping. If you lend money as a regular business rather than as a one-off favour, State money-lending laws may also apply, and some require a licence.

Promissory note, loan agreement, or both

A simple way to decide:

• Small, short, interest-free loan to a close relative or friend: a promissory note with a bank transfer record is usually enough.
• Larger loan, loan with interest, loan repayable in instalments or over a long period: a loan agreement, with a promissory note executed alongside it.
• Any loan with security or a guarantor: a loan agreement, because the terms on security and the guarantor's liability need to be spelt out. A separate guarantor agreement can be added.

If you use both, make sure the amount, dates and parties match exactly. Inconsistent figures in two documents are an easy argument for a borrower who later disputes the loan.

Mistakes that weaken a loan document

• Leaving the date or the amount blank to be filled in later. A borrower can say the document was signed blank and misused.
• Writing the amount differently in words and figures. Check both before signing.
• Using a name that does not match the borrower's identity documents, or leaving out the father's or spouse's name and address that identify the borrower.
• Signing on plain paper and meaning to stamp it later. Stamp duty is payable on execution.
• Recording a loan as a gift or as an investment in a business to avoid tax or paperwork. The document then works against you when you try to recover the money.
• Keeping no proof of the transfer. A promissory note that says money was received is strong evidence, but a matching bank entry removes most room for argument.
• Letting the borrower take the original note. The lender should hold the original until the loan is repaid.

The three-year limitation clock

A suit to recover the money must be filed within the limitation period in the Schedule to the Limitation Act, 1963. The articles most relevant to personal loans are:

• Article 19: suit for money payable for money lent, three years from when the loan is made.
• Article 21: money lent under an agreement that it is payable on demand, three years from when the loan is made.
• Article 35: suit on a promissory note payable on demand and not accompanied by any writing restraining or postponing the right to sue, three years from the date of the note.
• Article 31: suit on a promissory note payable at a fixed time after date, three years from when the note falls due.

The period can restart. Under section 18 of the Limitation Act, a written acknowledgment of the debt signed by the borrower before the period expires gives a fresh period from the date of signing. Under section 19, a part payment made before the period expires also starts a fresh period from the date of payment, provided the payment is acknowledged in the handwriting of, or in a writing signed by, the person making it. A short signed letter from the borrower confirming the balance, or a documented part payment, is worth keeping on file.

Cash loans and the Income-tax Act, 2025

The Income-tax Act, 2025 came into force on 1 April 2026. Section 185 of that Act (which corresponds to section 269SS of the Income-tax Act, 1961) says no person shall take or accept a loan or deposit from another person otherwise than by account payee cheque, account payee bank draft, electronic clearing system through a bank account or another prescribed electronic mode, if the amount, or the amount together with any earlier unpaid loan from the same person, is Rs 20,000 or more. Section 450 allows a penalty equal to the amount taken in breach.

Repayment has a matching rule. Section 188 (which corresponds to old section 269T) covers repayment of such loans by banks, companies, co-operative societies, firms and other persons through the same banking modes where the amount with interest is Rs 20,000 or more, and section 453 allows a penalty equal to the amount repaid otherwise. Both sections have exceptions, for example for loans from or to banks and certain government bodies, and section 185 does not apply where both parties have agricultural income and neither has any other income chargeable to tax. For loans taken or repaid before 1 April 2026, the 1961 Act provisions apply to that earlier period.

How to prepare and sign the documents

1. Transfer the money through a bank first, or on the same day, and save the transaction reference.
2. Prepare the loan agreement with the terms listed above, using the correct State stamp duty, and the promissory note with the Union stamp. Use the borrower's full name and address as in an identity document.
3. Have the borrower sign the promissory note, and have both parties sign every page of the loan agreement. Two witnesses with addresses help if the signatures are later denied.
4. Mention the bank transaction reference in the loan agreement, and keep copies of the borrower's identity proof.
5. Give the borrower a copy of the agreement and keep the original promissory note safely. The note is the document you will need to produce in court.
6. Record each repayment with a receipt, and when the loan is fully repaid, return the note marked as discharged.

If the borrower does not repay

Start with a written demand. A debt recovery notice that sets out the amount, the documents and a deadline often produces either payment or an admission. If you need to sue, a suit on a promissory note or for a debt under a written contract can be filed as a summary suit under Order XXXVII of the Code of Civil Procedure in the courts where that Order applies, where the defendant needs the court's leave to defend. Our guide on recovering money lent to a friend or relative walks through the options in order.

If the borrower gave you a cheque that bounced, section 138 of the Negotiable Instruments Act gives a separate criminal remedy with strict deadlines. That remedy covers cheques only, not promissory notes. See our guide on the section 138 timeline. You can also read questions other borrowers and lenders have asked on LegalFirms, or talk to a civil lawyer about a summary suit.