Is lending money on interest legal in India? Licence rules, simply

Is lending money on interest legal in India?

Yes. No law we read bans lending money at interest. Under the Constitution, "money-lending and money-lenders" is a state subject (State List, entry 30), so the rules differ from state to state, and most of them are aimed at people who lend as a business. Lending at interest runs into the law in three situations:

• You lend as a business without the licence or registration your state requires.
• You charge more than a legal limit that applies to you. Most limits bind money-lenders; Karnataka, Tamil Nadu and Kerala also forbid "exorbitant interest" by any person.
• You recover the money by threats or force. That is a crime whoever you are.

When are you a money-lender in the eyes of the law?

State money-lending Acts apply to the business of lending. Maharashtra’s 2014 Act defines it as "the business of advancing loans whether in cash or kind". Tamil Nadu’s 1957 Act calls someone a money-lender when advancing and recovering loans is their main or side occupation. Courts look at the whole pattern, not one loan:

• The Bombay High Court (Ashok Commercial Enterprises v. Hubtown Ltd, 21 January 2026) relied on earlier rulings that a money-lending business needs "a system, repetition, and continuity", and that an isolated transaction is not caught by the Act’s bar.
• The Kerala High Court (Manoj George v. State of Kerala, 4 December 2024) quashed a case against a man who had lent ₹6 lakh once. It said a hand loan given on one or two occasions is not "money lending", and that treating it as one would stop people helping each other in an emergency.

The more often you lend, and to more people, the more it looks like a business. Where the line falls for you depends on the facts, so ask a lawyer if you lend regularly.

Which states need a money-lending licence?

These rules come from each state’s own Act and apply to people who lend as a business. A one-off loan to family or a friend is not what they are about.

If your state is not in the table, we have not verified it yet. Your state’s registrar of money-lenders or a lawyer can tell you what applies.

Laws that reach even a one-off lender

Some states go further and limit the interest any person may charge, not only licensed money-lenders:

• Karnataka: "No person shall charge exorbitant interest on any loan advanced by him" (Prohibition of Charging Exorbitant Interest Act, 2004, s.3). Exorbitant means any rate above the one the state fixes for money-lenders, whether charged by the hour, day, instalment or month. Since March 2025 the penalty is up to 10 years in jail and a fine up to ₹5 lakh (s.4).
• Tamil Nadu: the same words in its 2003 Act (s.3). Daily, hourly, kandhu and meter vatti and thandal that work out above the state’s rate all count as exorbitant. Penalty: up to 3 years in jail and a fine up to ₹30,000 (s.4).
• Kerala: the 2012 Act (s.3) bars interest above the Money-Lenders Act rate. Penalty: up to 3 years in jail and a fine up to ₹50,000; harassing a borrower to recover a loan, up to 1 year and ₹10,000 (s.9).
• Gujarat: no "money-lender or a person advancing a loan" may charge more than the notified maximum (Money-Lenders Act, 2011, s.33(3)). If more was collected, the loan stands discharged and the excess must be refunded (s.33(4)). We have not yet read Gujarat’s rate notification.
• West Bengal: the 1940 Act limits what a borrower can be made to pay any "lender", a word it uses for anyone who advances a loan (ss.2 and 30).

Words like "no person" reach beyond licensed lenders, but courts still look at the facts: the Kerala case above was quashed partly because nothing showed a lending business or exorbitant interest. The limits themselves, in rupaye sekda, are in our legal interest rate guide, state by state.

Is ₹2 sekda legal? A worked example

Say you lend ₹50,000 to a friend at ₹2 sekda. That is ₹1,000 a month, or 24% a year. Here is what the same loan would earn at the highest rate three states allow on unsecured loans:

So ₹2 sekda is above every state limit we verified; the highest, West Bengal’s 20% for unsecured commercial loans, is ₹1.67 sekda. Whether a limit binds you depends on your state and on whether you lend as a business.

Is it illegal to lend in cash?

No, but cash brings an income-tax penalty. Under the Income-tax Act, 2025, in force from 1 April 2026, no one may take a loan of ₹20,000 or more (counting what is still unpaid to the same lender) except by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode (s.185). The penalty, equal to the loan, falls on the borrower (s.450). Repaying ₹20,000 or more in cash is barred too (s.188), with a penalty equal to the amount repaid (s.453).

Breaking the cash rule does not make the loan void. In Sanjabij Tari v. Kishore S. Borcar (25 September 2025), the Supreme Court held that a breach of the old section 269SS attracts only the tax penalty, and set aside the view that a cash loan above ₹20,000 is "illegal and void". The new sections 185 and 450 also provide a penalty only; they do not say the loan is void.

Even so, give larger loans through your bank, by account payee cheque or bank transfer. The bank record is your proof that the money was lent.

Is the interest you earn taxable?

Yes. Interest is income. If lending is not your business, it generally falls under "Income from other sources" (Income-tax Act, 2025, s.92) and is added to your income for the year. A CA can tell you how it applies to you.

Threats and force are crimes

However much is owed, recovering it through fear is an offence under the Bharatiya Nyaya Sanhita, 2023 (BNS), which replaced the IPC:

• Criminal intimidation (s.351): threatening injury to a person, their reputation or property to make them act. Up to 2 years in jail; up to 7 years for threats of death, grievous hurt or burning property.
• Extortion (s.308): putting someone in fear of injury to make them hand over property or sign a document. Up to 7 years.
• Abetment of suicide (s.108): up to 10 years.

States add their own offences for coercive recovery:

• Maharashtra (2014 Act, s.45): molesting a debtor, such as intimidating, following or loitering near their home or work, to recover a money-lender’s debt. Up to 3 years in jail, a fine up to ₹1 lakh, or both (amended in 2026).
• Karnataka (Micro Loan and Small Loan (Prevention of Coercive Actions) Act, 2025): coercive recovery carries up to 10 years and a fine up to ₹5 lakh (s.13). For vulnerable borrowers, loans made before the Act by unregistered, unlicensed lenders who use coercion are treated as wholly discharged (s.15).
• Tamil Nadu (Money Lending Entities (Prevention of Coercive Actions) Act, 2025): up to 3 or 5 years in jail depending on the act, or a fine up to ₹5 lakh, or both (s.21).

For the lawful way to get your money back, see how to recover money you lent.

If you are the borrower

• A court can cut excessive interest. Under the Usurious Loans Act, 1918 (s.3), if the interest is excessive and the deal was substantially unfair, a court can reopen the loan and relieve you of the excess. It is a central law, changed in some states.
• You can pay into court at the legal rate. In Karnataka, Tamil Nadu and Kerala, a borrower charged exorbitant interest can deposit what is due, with interest at the state’s rate, in court (s.5 of each state’s Act). The court can set interest already paid above that rate against the loan (s.8) and order the return of property taken towards it (s.6).
• Threats are a police matter. Karnataka’s 2025 Act says no police officer shall refuse to register a complaint under it (s.10).

What to do before you lend

1. Write it down. The amount, the date, the rate in both forms (for example "₹2 per ₹100 a month, that is 24% a year, simple"), when interest is due, and both signatures. A pronote is the simplest written form.
2. Pay through the bank. A cheque or bank transfer proves the loan, and a loan of ₹20,000 or more must not be taken in cash.
3. Give and take receipts. Every payment should get a dated receipt showing how much went to interest and how much to principal (why payments clear interest first).
4. Check the rate against your state’s limit. Convert it with the rate converter and compare it with our state table.
5. Don’t wait too long. The law gives a fixed time to go to court; see the time limit to recover a loan.
6. Never recover by threats. If the borrower does not pay, follow the lawful steps.

Sources

• Constitution of India, Seventh Schedule (Legislative Department): State List, entry 30, money-lending and money-lenders.
• Maharashtra Money-Lending (Regulation) Act, 2014, with Amendment Act 39 of 2026: ss.2, 13, 39 and 45.
• Ashok Commercial Enterprises v. Hubtown Ltd, Bombay High Court, 21 January 2026.
• Manoj George v. State of Kerala, Kerala High Court, 4 December 2024: also quotes Kerala Money-Lenders Act ss.3 and 17 and the 2012 Act ss.3 and 9.
• Karnataka Money-Lenders Act, 1961: ss.5 and 11.
• Karnataka Prohibition of Charging Exorbitant Interest Act, 2004, with Amendment Act 17 of 2025: ss.2 to 8.
• Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Act, 2025: ss.1, 2, 3, 10, 13 and 15.
• Tamil Nadu Money-lenders Act, 1957: ss.2, 3 and 17.
• Tamil Nadu Prohibition of Charging Exorbitant Interest Act, 2003: ss.2 to 8.
• Tamil Nadu Money Lending Entities (Prevention of Coercive Actions) Act, 2025: ss.3, 5, 18, 20 and 21; in force from 19 November 2025 (G.O. Ms. No. 580, Home).
• Kerala Prohibition of Charging Exorbitant Interest Act, 2012 (India Code): ss.2, 3, 5, 6, 8 and 9.
• Rajasthan Money-Lenders Act, 1963 (Revenue Department): s.11.
• Punjab Registration of Money-lenders Act, 1938: s.3; Acts extended to Delhi (Law Department, Delhi).
• Gujarat Money-Lenders Act, 2011: s.33.
• Bengal Money-lenders Act, 1940 (Kolkata Collectorate): ss.2 and 30.
• Uttar Pradesh Repealing Act, 2022.
• Usurious Loans Act, 1918 (Tripura High Court copy): s.3.
• Income-tax Act, 2025 (Gazette of India): ss.1, 92, 185, 188, 450 and 453.
• Sanjabij Tari v. Kishore S. Borcar, Supreme Court, 2025 INSC 1158: para 20.
• Bharatiya Nyaya Sanhita, 2023 (Ministry of Home Affairs): ss.108, 308, 351 and 358.