What is a Promissory Note?
Promissory note is a written promise to pay a debt. It is a financial instrument, in which one party (maker or issuer) promises in writing to pay a determinate sum of money to the other (the lender), either at a fixed, determinable future time or on demand of the payee subject to specific terms and conditions.
It is of different types-single/joint borrowers, payable on demand, payable in installments or as lump sum, interest-bearing and interest-free.
Things to keep in mind while writing a Promissory Note:
- It is governed by Section 4 of the Negotiable Instruments Act, 1881
- Promissory Note executed in one State may be presented in another State in India with the stamp bearing on the promissory note. No additional stamp duty need to be paid
- It should always be in hand written. The agreement must state, in writing, the terms of instrument, extent of liability (amount), maker’s and payee’s name and the amount to be paid, among other things.
- The promise to re-pay money and no other conditions should be mentioned in PN.
- When a person issues a promissory note, he/ she would have to stamp it as per the Indian Stamp Act and normally a revenue stamp is affixed on the PN signed by the promissory. You can use Re 1/- revenue stamp and get it cross signed by the borrower.
- You may also execute the PN note on a Stamp paper if revenue stamps are not available.
- Try to lend the money by cross A/c cheques. You can mention the cheque details in PN note.
- PN has a TIME validity. The Pro Note is valid for only 3 years from the date of execution.
- There is no limitation or ceiling with respect to the AMOUNT.
- If the borrower pays a part repayment then limitation of 3 years can be from either the date of execution or the last date of payment/acknowledgement whichever is later. The repayments are generally hand written on the back side of PN document (signed by both the parties).
- PN is generally held by the Lender (Issuer). Once the loan is discharged or fully paid off, it should be canceled and marked as “PAID IN FULL”. And can be returned to the payee (borrower).
- Witness signature is not required. But it is advisable to get it signed by a witness (a person who is not a party of the note. You may consider getting it notarized as well but it is not mandatory)
- Sample of promisory note
