Promissory Note

Reviewed by Adithyan | Updated on May 18, 2022


Introduction to promissory note

A promissory note is a legal and a financial instrument that is written between three financing parties: the maker, the lender, and the payee/the borrower. This note contains terms of the issuance, details of the debt like the circumstances of the loan, who the bearer is and from whom, the maturity date, the amount payable with interest or not, and more. It is a written promise by the lender assuring the borrower that they can avail money from the lender as specified after agreement. The maker can be the lender too.

Understanding Promissory Note

Promissory notes are a written promise made by the maker for individuals and companies to see sources of finance from other than just banks. The note attests the validity of the lender and promises the credit worthiness of the borrower, since a promissory note only promises the repayment of the loan or credit that has been lent. In India, a promissory note can be issued under Section 4 of the Negotiable Instruments Act, 1881, therefore making it a legal instrument and binding the parties by law, the source of funds being an unregulated method. Even so, promissory notes are classified into secured and unsecured notes. Secured notes function a lot like bank loans with the requirement of a collateral, whereas unsecured notes require only a healthy credit score. Promissory notes are also considered securities, and are thus traded on the money market in India by banks and traders. They lay alongside bills of exchange, IOUs etc. but in comparison, contain a promise and the steps to fulfil the promise.

Highlights of Promissory Notes

  • Promissory notes are subject to 18% GST as of 1st July, 2017 in India.
  • A promissory note cannot be valid unless it contains details about the nature of credit, the means to repay it along with the duration given for the repayment, the signatures of all parties, the conditions agreed in the sanction of the loan, the rate of interest and all related terms.
  • On its own, a promissory note is unconditional. It is only conditional to the parties mentioned as the lender and the borrower in the note. That is why the note is a great negotiable instrument on the money market.
  • The note must be written by hand.
  • The note must be stamped by revenue stamps as per the rules of the Indian Stamp Act.
  • Promissory notes are valid for three years only.
  • There is no limit on the amount to be borrowed for a promissory note to be issued.

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