Real Estate Newsletter – Personal Loans To Relatives And Friends: Legal Overview: August 2025
A. Introduction:
Lending money by Individuals to friends and family members is a common practice in India. However, these seemingly informal transactions carry significant legal implications that are often overlooked. This newsletter examines the legal framework governing personal loans between friends and family members, with a specific focus on the applicability of the Maharashtra Money Lending (Regulation) Act, 2014 (hereinafter “the Act”). Understanding these legal considerations is essential for ensuring that such loans remain legally enforceable and do not inadvertently violate regulatory requirements.
B. Legal Documentation for Personal Loans to Friends and Family:
- Every loan agreement has to be made in writing and must satisfy all elements of a valid contract under the Indian Contract Act, 1872, including offer, acceptance, consideration, capacity to contract, and lawful object.
- For granting a loan, it is not necessary for the lender and borrower to be family members or have a close personal relationship. However, where such a relationship exists, it is important to expressly state in writing that the intention is to grant a loan and not to make a gift. In Harish Dubey vs. Ankur Jain 2016 SCC Online Del 19281, the Delhi High Court held that before seeking recovery, the plaintiff must establish that the money was indeed granted as a loan.
- The loan agreement should be executed on appropriate stamp paper as per the Maharashtra Stamp Act, 1958. The value of the stamp paper depends on the loan amount.
- Having independent witnesses to the execution of the loan agreement strengthens its evidentiary value.
- A separate receipt or acknowledgment of the loan amount by the borrower provides additional proof of the transaction.
C. When Does the Act Apply to Personal Loans?
- The applicability of the Act to personal loans between friends and family hinges on whether such lending constitutes a “business of money-lending”.
- In Tradelink Exim (India) Pvt. Ltd. vs. Tulip Land and Developers Pvt. Ltd.2and Mahesh P. Raheja and Others. vs. Base Industries Group and Others3, the courts held that, in order to qualify as a money lender, a person must be engaged in the regular course of business of advancing loans in a real, substantial, systematic, and organized manner that is continuously carried on by application of skill or labour with the intention of earning income. Therefore, if an individual advances a one-time personal loan to a family member or friend and does not engage in the regular business of lending, they cannot be classified as a money lender under Section 2(14) of the MML Act. Accordingly, the licensing provisions of the Act will not be applicable to such a lender.
- In Mahesh P. Raheja and Others vs. Base Industries Group and Others, 2018 SCC Online Bombay 21322, the courts further clarified that if the opposing party claims that the lender is, in fact, engaged in the business of money lending without a license, the burden of proving the existence of such a business lies on the debtor. The mere act of giving a loan to one or a few individuals does not amount to engaging in the business of money lending in the absence of a license.
- As such, the Individual granting loan needs to check on following:
a. Emphasis on “business,” not merely “lending”: To qualify as a business, lending must be “systematic, regular, repetitive, and continuous, and must generate an appreciable revenue”.
b. Isolated transactions are exempt: A single isolated instance or even several isolated instances of lending do not constitute the “business of moneylending”.
D. Conclusion:
Personal loans to friends and family members exist in a unique legal space where personal relationships intersect with financial and legal obligations. Under the Act, a license is required only if an individual is engaged in the business of money lending. Isolated transactions lacking the systematic characteristics of a business generally fall outside the scope of the Act. However, proper documentation remains essential to ensure legal enforceability, even in such informal arrangements.
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1 Harish Dubey vs Ankur Jain 2016 SCC Online Del 1928
2 Tradelink Exim (India) Pvt. Ltd. vs. Tulip Land and Developers Pvt. Ltd. 2018(1) ABR308
3 Mahesh P. Raheja and Ors vs. Base Industries Group and Ors. 2018 SCC Online Bombay 21322
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