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Legal Format | India

Loan Agreement Between Employer and Employee

A practical staff-loan agreement format for housing, vehicle, personal or other approved employee loans, with clauses for disbursement, interest, salary deductions, repayment, early payment, default and cessation of employment.

Employer-to-Employee Staff Loan Agreement

Employers may provide loans or advances to employees under an approved staff-loan policy for purposes such as housing, vehicles, education, medical needs or personal expenses. A written agreement helps record the sanctioned amount, permitted use, interest rate, repayment schedule, authority for lawful salary deductions, security (if any), and the consequences of resignation, retirement, termination or default.

Current-law note: This template is intended for use in India and should be adapted to the employer's constitution, staff-loan policy, applicable stamp law, employment/wage law and tax rules. A company incorporated under the current company-law framework should ordinarily be described by reference to the Companies Act, 2013 rather than the Companies Act, 1956. Interest-free or concessional employer loans may also have employee tax-perquisite consequences under the Income-tax Act, 2025 and the Income-tax Rules, 2026.

The Indian Contract Act, 1872 continues to supply the general legal framework for enforceable contractual obligations. Where repayment is made through payroll, deductions should be made only to the extent and in the manner permitted by applicable wage law and with the employee's express written authority where required.

Before signing: Insert the exact loan amount, purpose, interest basis, instalment amount, first deduction date, repayment period, prepayment terms, default charges (if any), security, governing law and jurisdiction. Obtain proper stamping as required by the law applicable in the State or Union Territory where the instrument is executed.

Sample Employer-Employee Loan Agreement

This Loan Agreement ("Agreement") is made on this _____ day of __________, 20___.

Between

Mr./Ms. ______________________________, residing at ________________________________________________, employee ID ____________, hereinafter referred to as the "Borrower" (which expression shall, where the context permits, include his/her legal representatives, heirs, executors and administrators), of the FIRST PART;

And

________________________________________, a company/entity incorporated or constituted under applicable law and having its registered/principal office at ________________________________________________, hereinafter referred to as the "Employer" or "Company" (which expression shall, where the context permits, include its successors and permitted assigns), of the SECOND PART.

Recitals

A. The Borrower has applied to the Employer for a staff loan/advance of ₹______________ (Rupees __________________________________ only) for the purpose of __________________________________.

B. The Employer has sanctioned/agreed to sanction the loan subject to this Agreement, the sanction letter and the Employer's applicable staff-loan policy.

C. The parties wish to record the terms governing disbursement and repayment of the loan.

Terms and Conditions

  1. Sanction documents. The Borrower's application, the sanction letter and the repayment schedule, as accepted by the Borrower, shall form part of this Agreement. In the event of an inconsistency, this Agreement shall prevail unless the sanction letter expressly states otherwise and is signed by both parties.
  2. Loan amount and disbursement. Subject to completion of the Employer's internal requirements, the Employer shall disburse up to ₹______________. The amount may be paid directly to the Borrower or, where appropriate to the approved purpose, to a seller, service provider, lender or other payee identified in the sanction letter.
  3. Purpose and utilisation. The Borrower shall use the loan only for the sanctioned purpose. Where proof of utilisation is required by the staff-loan policy or sanction letter, the Borrower shall submit reasonable supporting documents within the prescribed period.
  4. Interest. The loan shall carry interest at _______% per annum on a fixed / floating basis, calculated on ____________________________. If the loan is interest-free, write "Nil". The Employer shall disclose any change mechanism applicable to a floating rate in the sanction letter or repayment schedule.
  5. Repayment. The Borrower shall repay principal and interest, if any, in ______ monthly instalments of ₹______________ each beginning from __________________, subject to the final instalment adjustment. A repayment schedule may be attached as Annexure A.
  6. Salary deduction authority. Subject to applicable law, the Borrower expressly authorises the Employer to deduct the agreed instalments and other lawfully recoverable amounts from salary or wages payable to the Borrower. No deduction shall be made contrary to any statutory restriction or maximum deduction limit applicable at the relevant time.
  7. Prepayment. The Borrower may prepay the whole or any part of the outstanding loan in accordance with the sanction terms. Any prepayment charge shall apply only if expressly stated in the sanction letter and legally permissible.
  8. Security. The loan shall be unsecured / secured by __________________________________. If security is required, the Borrower shall execute the applicable security documents and maintain the security as required by the sanction letter.
  9. Events of default. Subject to applicable law and reasonable notice, the Employer may declare the outstanding amount due and payable if the Borrower (a) materially defaults in repayment; (b) uses the loan for a materially different purpose contrary to the sanction terms; (c) commits fraud or makes a materially false statement in obtaining the loan; or (d) fails to maintain agreed security and does not cure the default within the period stated in a written notice.
  10. Default charges. Any late-payment or default charge shall be only as specifically disclosed in the sanction letter and shall be applied only to the extent permitted by applicable law. No undisclosed or retrospective charge shall be imposed.
  11. Cessation of employment. If the Borrower's employment ends by resignation, retirement, termination, death or otherwise, the outstanding balance shall be dealt with in accordance with the sanction letter, staff-loan policy and applicable law. The Employer may recover or set off amounts from terminal dues only to the extent legally permissible. Any balance remaining thereafter shall continue to be payable by the Borrower or, where legally enforceable, the Borrower's estate/legal representatives.
  12. Continuation after cessation. At its discretion and subject to applicable policy, the Employer may permit the loan to continue after cessation of employment on revised repayment arrangements or adequate security recorded in writing.
  13. Tax treatment. The Borrower acknowledges that an interest-free or concessional loan may constitute a taxable perquisite under applicable income-tax law. The Employer may value, report, withhold or account for such perquisite as required by law. Any statutory exemption or threshold shall apply only if its conditions are satisfied.
  14. Notices. Any notice under this Agreement shall be sent to the latest postal address or electronic contact details recorded with the Employer. The Borrower shall promptly notify any change in contact details.
  15. Amendments. No material amendment to the amount, interest rate, repayment obligations or security shall bind the Borrower unless communicated in writing and accepted where acceptance is required by law. Changes made solely by reason of a mandatory change in law may be implemented after appropriate notice.
  16. Governing law and jurisdiction. This Agreement shall be governed by the laws of India. Subject to any mandatory statutory forum or jurisdiction, courts/tribunals at __________________________ shall have jurisdiction over disputes arising from this Agreement.
  17. Entire agreement. This Agreement, together with the sanction letter, repayment schedule and identified annexures, records the understanding between the parties concerning the loan and supersedes prior inconsistent communications relating to the same subject.
  18. Severability. If any provision is held invalid or unenforceable, the remaining provisions shall continue to operate to the extent permitted by law.

IN WITNESS WHEREOF, the parties have signed this Agreement on the date first written above.

BORROWER / EMPLOYEE

Signature: ___________________________
Name: ______________________________
Employee ID: ________________________
FOR THE EMPLOYER / COMPANY

Signature: ___________________________
Name: ______________________________
Designation: _________________________

Witnesses

Witness 1

Signature: ___________________________
Name: ______________________________
Address: _____________________________
Witness 2

Signature: ___________________________
Name: ______________________________
Address: _____________________________

Practical Points Before Using the Format

Attach the sanction letter and repayment schedule, identify whether the loan is secured or unsecured, and avoid leaving essential commercial terms to an employer manual that can be changed unilaterally without notice. For salary recovery, ensure the deduction mechanism complies with the wage law applicable to the employee and establishment.

For loans granted during tax year 2026-27 and later, employers should also review the Income-tax Act, 2025 and Income-tax Rules, 2026. The notified rules provide a valuation mechanism for interest-free or concessional employer loans and include specified exceptions, so payroll treatment should be checked against the facts of each loan.