A practical guide to the director-source declaration, deposit classification, board approval, DPT-3, interest, TDS, GST, security and repayment controls.
Yes. An Indian company can generally borrow from a person who is its director when it receives the money. To keep the amount outside the statutory definition of “deposit”, the director must give the prescribed written declaration that the funds were not obtained by borrowing or accepting loans or deposits from others. The company must separately approve the borrowing, document its terms, maintain a bank trail, report and disclose it correctly, and handle interest, TDS, security and repayment according to the actual arrangement.
A director loan is not automatically a deposit. The exclusion depends on who gives the money, that person’s status when the company receives it and where the money came from.
This is a source-of-funds rule, not a formality. A director cannot safely sign the declaration if a bank, another business, a friend or another person funded the advance. Routing third-party money through the director’s account does not change its economic source and can undermine the exclusion.
The company must also disclose the required particulars in its Board’s report and comply with the annual reporting framework for amounts that are not treated as deposits. The exclusion avoids deposit classification; it does not remove corporate approval, accounting, tax or repayment obligations.
Section 185 restricts a company from directly or indirectly advancing loans, including book debts, or giving guarantees or security for loans taken by directors and specified connected persons. It does not itself prohibit a director from putting personal money into the company.
Section 186 governs specified financial exposure created by the company. It is not the primary permission for the company to receive an ordinary loan from an individual director.
If the company receives money from a director and then lends, guarantees or provides security for the director or a connected entity, the outward transaction needs its own Sections 185 and 186 analysis. Substance matters more than the sequence of bank entries.
The Board’s power to borrow money is exercised by resolution passed at a Board meeting under Section 179(3)(d), subject to the articles, lawful delegation and any applicable borrowing limits or member approval under Section 180.
The core exclusion refers to a person who is a director of the recipient company at the time of receipt. The company should verify the appointment, DIN and MCA record and obtain a declaration for the actual money received.
The rules extend the exclusion to an amount received by a private company from a relative of its director, subject to the prescribed declaration and disclosure conditions. Do not extend this wording to a public company or to a person who is merely a shareholder or friend.
A shareholder who is not a director does not qualify merely because the company is founder-owned. The amount must fit another exclusion or the company must follow the applicable deposit framework.
A person who becomes a director only after transferring the money cannot retrospectively sign as if they held office on receipt. Where the person was a director when the company received it, retain that evidence even if they later resign.
Cross-border receipt may engage external commercial borrowing, permitted-lender, all-in-cost, maturity, reporting and authorised-dealer requirements. Do not remit first and classify later.
This is an editorial compliance framework, not a substitute for a company-specific legal or tax opinion.
Confirm that the company may borrow on the proposed terms. For companies to which Section 180 applies, assess whether aggregate borrowings trigger member approval. Private companies have specific exemption history that should be checked against current notifications and their status.
The signed declaration should identify the lender, company, amount or facility, date and confirmation that the funds were not acquired by borrowing or accepting loans or deposits from others. Obtain it before or with each receipt.
Record the business need, lender relationship, amount or ceiling, interest, tenor, repayment, security, bank account, authorised signatories and conflict disclosures. Follow Section 179 and the articles; do not substitute an informal founder message.
State whether the facility is secured or unsecured, demand or term, interest and payment dates, permitted use, prepayment, default, subordination, set-off, conversion prohibition or option where lawful, governing law and notices. Stamp duty varies by state and instrument.
Transfer from the director’s own disclosed account into the company account. Avoid cash, pass-through accounts and unexplained journal entries. Income-tax restrictions on cash acceptance and repayment may independently apply.
If company assets secure the loan, approve the security and assess charge registration under Section 77 and the current MCA form and timeline. A loan described as unsecured should not be supported by undisclosed control over company assets.
Post the correct ledger entry, accrue interest consistently, schedule TDS review, map DPT-3 and Board-report disclosure, retain confirmations and make repayments only under the agreement and solvency plan.
An interest-free loan may preserve company cash and is not automatically prohibited. Document that no interest accrues, consider accounting treatment and minority or governance implications, and avoid later creating backdated interest.
Set the rate, calculation base, due dates and default consequences. Test business-purpose deductibility, TDS, related-party disclosure, cash-flow capacity and whether the rate can be defended commercially.
“Repayable on demand” can create liquidity and going-concern pressure. Add notice, minimum liquidity, subordination or repayment gates where appropriate rather than assuming the founder will never demand payment.
Use a realistic repayment schedule tied to cash generation. State whether early repayment is permitted and what happens if a funding round, bank covenant or loss makes repayment imprudent.
Identify the asset, priority, enforcement rights and existing lender covenants. Approve and register the charge where required, and check whether shareholder or third-party consents are needed.
A written subordination can prevent repayment ahead of senior lenders or while specified conditions apply. It should be deliberate and consistent with the director’s expectations.
Qualifying director money may be outside “deposit”, but that does not make it invisible. The deposit rules require annual reporting of specified deposit and non-deposit transactions through Form DPT-3. Companies commonly report the position as at 31 March by the prescribed June deadline, but the current form, due date, portal and exemptions should be verified for the filing year.
The Board’s report must include the prescribed director-funding disclosure connected to the exclusion. Financial statements should consistently identify the related-party relationship, loan classification, maturity, security, interest and balances under the applicable Schedule III and accounting framework.
If security is created, charge registration and the company’s register of charges form another compliance stream. If the director later converts the loan into securities, that is a new corporate action requiring its own valuation, allotment, private-placement or rights process, filings and tax analysis. A loan agreement should not imply automatic conversion without a lawful mechanism.
Suitable when repayment is uncertain and the director is prepared to increase equity exposure. Requires a lawful issue route, pricing and allotment filings; it changes ownership economics.
Useful only when conversion terms, valuation, issue procedure, tax and FEMA position are designed at the start. It is not an informal promise to convert later.
May suit larger or secured funding, but invokes debenture, offer, charge, trustee and listing considerations depending on the instrument and issue.
Preserves founder repayment separation but can require security, guarantees, financial reporting and restrictive covenants.
Choose according to loss absorption, repayment visibility, ownership effect, security, regulatory workload and the next financing round. If the company cannot forecast repayment without relying on a future investor, equity may be more honest than a demand loan.
TargoLegal can review the lender’s status and source, company borrowing authority, declaration, Board resolution, loan agreement, security, DPT-3 treatment, accounting handoff and repayment controls before money moves.
Generally yes. An amount received from a person who is a director when the company receives it can fall outside the definition of deposit if the director gives the required written declaration that the money was not obtained by borrowing or accepting loans or deposits from others. Corporate approvals, reporting, accounting and tax rules still apply.
No. Section 185 principally restricts a company from advancing loans, guarantees or security to directors and connected persons. It does not itself prohibit a director from lending personal funds to the company. The incoming money must instead be tested under the deposit rules and the company’s borrowing powers.
The deposit rules contain a specific exclusion for money received from a relative of a director by a private company, subject to the prescribed source declaration and disclosure conditions. Other company types and other relationships require a separate deposit-law analysis.
Not if the company wants to rely on the director-source exclusion that requires a declaration that the amount was not acquired by borrowing or accepting loans or deposits from others. A false declaration creates serious risk. Another lawful funding route should be analysed instead.
Company law does not make interest compulsory merely because the lender is a director. The board should decide and document whether the loan is interest-free or interest-bearing after considering cash flow, tax, accounting, minority-interest and governance consequences.
Amounts not treated as deposits, including qualifying director loans, generally fall within the annual DPT-3 reporting framework under the Companies (Acceptance of Deposits) Rules. The company should verify the current form, reporting period, due date and applicable exemptions before filing.
Do not treat this as an ordinary domestic director loan. Receipt from a non-resident can engage FEMA, external commercial borrowing, pricing, maturity, reporting and permitted-lender rules. Obtain cross-border legal and authorised-dealer bank review before funds move.
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