If you’re a director or founder, this question is more common than it looks on paper. I’ve seen it come up in startups, family businesses, and even profitable companies facing temporary cash flow gaps. The short answer is reassuring: yes, a director can give a loan to a company—but only if the rules are followed carefully.
This isn’t a casual money transfer. Company law treats such transactions seriously to prevent misuse, money laundering, or hidden borrowings. In this blog, we’ll break down when a director can offer a loan, what conditions apply, how it’s treated under the Companies Act, and what mistakes you must avoid. No legal jargon overload—just practical clarity.
Can a Director Give a Loan to a Company?
Let’s start clearly, because this is where confusion usually begins.
Yes, a director can give a loan to a company, provided:
- There is a written agreement
- Board approval is obtained
- The money comes from the director’s personal sources
- Proper disclosures are made
In fact, the law explicitly allows this route, especially for private companies, but only under specific conditions.
Why Director Loans Are Closely Regulated
When money flows into a company, the law wants to know who is funding whom—and why.
Unregulated loans could:
- Hide borrowings from banks
- Bypass deposit rules
- Be used for round-tripping funds
That’s why director loans are treated separately from public deposits.
Director Loan as an “Exempted Deposit”
Here’s an important legal relief many directors don’t know about.
👉 Loans from directors are considered “exempted deposits” under the Companies (Acceptance of Deposits) Rules, 2014.
This means:
- The company does not have to comply with harsh deposit rules
- No deposit insurance or advertisement is required
But the exemption isn’t automatic.
Mandatory Conditions for Director Loan
A director can offer a loan to their company only under specific conditions.
- Written Declaration of Source of Funds
The director must give a declaration stating:
- The loan is not from borrowed funds
- It is from the director’s own personal income or savings
This declaration is non-negotiable.
- Board Approval Is Mandatory
Before accepting the loan:
- A board resolution must be passed
- Terms such as interest (if any) must be recorded
No informal approvals. No WhatsApp confirmations.
- Written Loan Agreement
A clear loan agreement should include:
- Amount of loan
- Interest rate (or nil interest)
- Repayment terms
Even between founders, documentation protects both sides.
Private Company vs Public Company: Key Difference
For Private Companies
✅ A Private Company is allowed to accept loan from its directors with fewer restrictions.
As long as:
- The director gives a declaration
- Board approval exists
No shareholder approval is usually required.
For Public Companies
Rules are stricter.
For public companies:
- Additional compliance under Sections 179 and 186 may apply
- In some cases, shareholder approval is required
- Limits on loan acceptance must be monitored
So while director loans are allowed, the structure matters.
Interest on Director Loan: Is It Compulsory?
No. Interest is optional.
- The loan can be interest-free
- Or carry reasonable interest
But here’s the catch:
- Excessive interest may raise tax concerns
- Interest paid is a deductible expense for the company
Always align rates with commercial reality.
Accounting Treatment of Director Loan
From an accounting perspective:
- Shown as Unsecured Loan from Director
- Reflected in financial statements
- Disclosed in notes to accounts
Lack of disclosure is a common statutory audit red flag.
Can the Director Withdraw the Loan Anytime?
Legally, yes—if terms allow.
But practically:
- Sudden withdrawal can disrupt operations
- It may trigger going-concern concerns in audits
Best practice: set realistic repayment timelines.
Common Mistakes Directors Make (Costly Ones)
I’ve personally seen companies penalised for these:
- ❌ No declaration of source of funds
- ❌ Treating borrowed money as director loan
- ❌ No written agreement
- ❌ Missing board resolution
- ❌ Mixing loan with capital contribution
Most of these are easily avoidable.
Tax Implications You Should Know
The loan itself is not taxable for the company.
But:
- Interest received is taxable in the director’s hands
- Interest paid is deductible for the company
Also, ensure:
- Loan does not appear as undisclosed income
Clean documentation = tax peace of mind.
Practical Scenario (Very Common)
A founder-director injects ₹10 lakh to cover salaries.
If done correctly:
- Board approves loan
- Declaration filed
- Agreement executed
✅ Fully compliant.
❌ If transferred casually? Potential violation.
The difference is paperwork—not intent.
Should You Convert Director Loan into Share Capital?
Sometimes yes.
Director loans are ideal for:
- Short-term cash needs
Equity infusion is better for:
- Long-term funding
But conversion also triggers valuation and ROC filings. Choose strategically.
Conclusion
A director can offer a loan to their company only under specific conditions. Loans from directors are considered exempted deposits, but only when backed by declarations, approvals, and documentation. Especially in private companies, this flexibility exists for a reason—but compliance makes all the difference between support and scrutiny.
If you’re planning to fund your company personally, don’t cut corners.
👉 Need help structuring or documenting a director loan correctly? Get it reviewed professionally at callmyca.com and avoid compliance headaches later.
