What is a Promissory Note?
A Promissory Note is a legally binding financial instrument in which a borrower (maker) promises to repay a lender (payee) a specified sum of money within an agreed-upon timeframe.
Key Components
- Parties Involved – Maker (borrower), Payee (lender).
- Loan Details – Amount, interest rate (if applicable), repayment terms.
- Legality – Governed under Section 4 of the Negotiable Instruments Act, 1881 in India.
- Negotiability – Can be traded in financial markets like bills of exchange.
Types of Promissory Notes
- Secured Promissory Note – Requires collateral (like bank loans).
- Unsecured Promissory Note – Based on creditworthiness (no collateral needed).
Legal & Taxation Aspects
Key Legal Conditions
- Must be handwritten.
- Revenue stamp mandatory (as per Indian Stamp Act).
- Valid for 3 years from the date of execution.
- No borrowing limit specified.
- Must include an unconditional promise to pay.
Taxation
- 18% GST applies on promissory notes (effective July 1, 2017).
Advantages of Promissory Notes
- Alternative Financing – Helps individuals & businesses secure funds beyond banks.
- Legal Recognition – Acts as evidence in case of disputes.
- Negotiability – Can be traded in financial markets.
- Flexibility – Borrowers & lenders can customise repayment terms.
