Updated for FY 2026-27 (AY 2027-28).

Director and shareholder loans: a ledger structure that fills in your related-party disclosure on its own

Most small companies fund a cash crunch the same way: a director transfers money from their personal savings account into the company current account, and someone books it to a catch-all "Directors Loan A/c". Twelve months later the auditor asks for opening balance, closing balance, maximum amount outstanding during the year, interest charged and the terms of repayment, per lender — and nobody can produce it without re-reading a year of bank statements. The fix costs about ten minutes a month and starts with how you name the ledger.

Know what the schedule asks for before you design the ledger

The related-party note in a set of statutory accounts, and the Schedule III presentation that sits behind it, needs five things for every lender who is a director, a shareholder, or a relative of either:

• the name of the party and the nature of the relationship (director, director's spouse, member holding more than a stated percentage)
• the opening balance and the closing balance
• the amount received and the amount repaid during the year, shown gross, not netted
• the maximum amount outstanding at any point during the year
• the terms: rate of interest, whether repayable on demand, whether secured, and whether interest was actually paid or only accrued

Nothing in that list is exotic. All five fall out automatically if each lender has their own ledger account and every entry hits that account on the date the money actually moved. The problems appear only when loans from three people sit in one account, or when a repayment is passed as a contra against an expense reimbursement.

One ledger per lender, named so you can never mix them up

Create a separate liability ledger for each person, with the relationship in the name itself:

• Unsecured loan — Rajesh Kumar (Director)
• Unsecured loan — Sunita Kumar (Director's spouse)
• Unsecured loan — Meera Holdings Pvt Ltd (Shareholder)

Then create matching interest ledgers where interest is payable: "Interest payable — Rajesh Kumar (Director)". Keep principal and interest apart. The moment accrued interest sits inside the loan account, your maximum-outstanding figure is wrong and your TDS reconciliation becomes guesswork.

Group all of these under a parent head called "Unsecured loans — related parties", separate from "Unsecured loans — others" (a friend of the promoter who is not a relative, a vendor who converted dues into a loan). The parent head becomes the related-party note; the child ledgers become its rows.

Add a short tag in every narration — RPT-DIR-RK or similar — so that even if someone posts to the wrong account, a search on the tag pulls the full population for review.

Get three documents in place before the money moves

Accounting cannot rescue a transaction that should not have happened. For a private limited company, before the transfer:

1. A declaration from the lender that the money is their own funds and is not borrowed or accepted from others. This is what keeps a director's loan outside the deposit rules. File it with the board papers and note the date in the ledger narration.
2. A board resolution recording acceptance of the loan, the amount, the rate of interest and the repayment terms. "Repayable on demand, interest at 12% per annum" is enough — vagueness is what costs you later.
3. A one-page loan agreement or letter, signed and dated. Your auditor will ask for it, and so will a bank during due diligence.

Loans from a member who is not a director sit under different limits, and loans from a body corporate shareholder raise their own questions. Whether your company can accept them, and up to what amount, is a Companies Act question — check with your CA before the transfer, not after. Separately, the annual return of money received that is not treated as a deposit may apply to your company; ask your CA whether you need to file it.

And never in cash. Sections 269SS and 269T restrict taking or repaying loans in cash above a specified limit, and the penalty can equal the amount of the loan. Confirm the current limit with your CA; in practice, treat the answer as "bank transfer only".

The four entries you will ever need

Receipt of ₹20,00,000 by NEFT on 10 April 2026:

Quarterly interest accrual at 12% per annum (₹60,000 for the quarter), with tax deducted at source. Interest paid to a resident on a loan attracts TDS under section 194A; ask your CA to confirm the rate and threshold that apply to your company. The illustration assumes ₹6,000 was deducted.

Payment of the net interest:

Part repayment of principal, ₹5,00,000 on 20 January 2027:

Four entry types, repeated. The related-party note is then just a ledger extract: opening nil, received ₹20,00,000, repaid ₹5,00,000, closing ₹15,00,000, maximum outstanding ₹20,00,000, interest charged ₹2,40,000.

A worked example: does charging interest actually help?

Take the same ₹20,00,000 at 12% for a full year — interest of ₹2,40,000. Rajesh is a salaried director drawing ₹18,00,000 a year and files under the new regime.

Rajesh's side. Salary ₹18,00,000 less the standard deduction of ₹75,000 gives ₹17,25,000. Tax on that under the FY 2026-27 new regime slabs: nil up to ₹4,00,000; 5% on the next ₹4,00,000 is ₹20,000; 10% on ₹8–12 lakh is ₹40,000; 15% on ₹12–16 lakh is ₹60,000; 20% on the remaining ₹1,25,000 is ₹25,000. Total ₹1,45,000, plus 4% cess, equals ₹1,50,800.

Add the interest income of ₹2,40,000 and total income becomes ₹19,65,000. Tax works out to ₹1,93,000 plus cess of ₹7,720, that is ₹2,00,720. The interest therefore costs Rajesh ₹49,920 in personal tax, all of it in the 20% band.

The company's side. Assume a domestic company with turnover below ₹400 crore paying 25% plus 4% cess. A deductible interest charge of ₹2,40,000 reduces tax by ₹62,400 (ignoring surcharge).

Net saving across the two of them: ₹12,480 for the year. Useful, but not dramatic — and it reverses the moment the director's income crosses into the 25% or 30% band, where personal tax on the interest exceeds the company's deduction. That is the real decision: compute both sides before fixing the rate, rather than defaulting to 12% because the last company did. Interest-free is also a legitimate choice for a director's own money; just say so in the resolution, so the auditor does not have to assume.

Three things that break the schedule, and how to avoid them

Netting. A director lends ₹3,00,000 in May and the company repays ₹1,00,000 in August. Passing a single ₹2,00,000 entry understates both receipts and repayments and hides a maximum outstanding of ₹3,00,000. Post every leg on its own date.

Mixing reimbursements with the loan. A director pays a vendor from a personal card and the amount lands in the loan account. Now your loan balance includes operational reimbursements, and the ledger no longer matches the loan agreement. Use a separate "Payable to director — reimbursements" ledger and settle it monthly.

Wrong classification. Repayable on demand means current liability. A loan with a written two-year term is non-current until the last twelve months, then it moves. Review classification at the balance-sheet date rather than carrying forward last year's grouping.

Once a quarter, send each lender a one-line confirmation by e-mail — "Balance outstanding as on 30 September 2026: ₹15,00,000, interest accrued ₹1,80,000" — and save the reply. That is your external confirmation, obtained without a scramble in October next year.

Doing this in FlipAccounts

Create each lender as a separate ledger under Chart of Accounts, grouped under unsecured loans, and keep principal and interest in different accounts. Record receipts and repayments from the Bank reconciliation screen when the transfer appears in your imported statement — a categorisation rule on the director's name will route the same transfer correctly every month thereafter, as described in our bank statement reconciliation guide. The interest accrual and TDS entry goes in as a journal, and the TDS summary picks up the deduction alongside your other sections. At year end, open the General Ledger in the statements pack, filter to the related-party group, and export to Excel — opening balance, every movement with its date, and the closing balance are already laid out in the order your auditor's schedule needs. The read-only auditor role lets them pull it themselves without e-mailing you for files.

What to do this week

1. Split any pooled "Directors Loan A/c" into one ledger per lender, dated from the start of the financial year, and move reimbursements out into their own account.
2. Collect the missing paperwork — the lender's declaration that the funds are their own, the board resolution and a signed letter stating rate and repayment terms — for every loan currently on the books.
3. Run a general ledger extract for each lender and note the maximum balance during the year so far; if it does not reconcile to the bank statement, fix it now rather than in July.

Frequently asked questions

Can a private limited company accept an interest-free loan from a director?

Yes, and it is common. Record the terms in the board resolution so the nil interest is deliberate rather than an omission, and keep the lender's declaration that the funds are their own on file. Whether any imputed-interest or transfer-pricing question arises in your specific facts is worth a quick check with your CA.

Is a loan from a shareholder treated as a deposit?

It depends on who the shareholder is and how much is involved. A loan from a director supported by the prescribed declaration is generally kept out of the deposit rules; loans from members who are not directors are subject to limits tied to paid-up capital and free reserves. Confirm the position with your CA before accepting the money, because the remedy afterwards is expensive.

Do I deduct TDS on interest paid to a director?

Interest on a loan paid to a resident falls under section 194A, and the deduction is due at payment or credit, whichever is earlier — which means an accrual entry on 31 March triggers it even if no money has moved. Check the applicable rate and threshold for your case with your CA, deposit the tax on time, and report it in the quarterly 26Q.

What if the director's loan has sat on the books for years with no movement?

An old static balance is not a problem in itself, but it needs the same disclosure as a fresh loan: closing balance, terms and relationship. Get a written confirmation from the lender, decide and document whether it is repayable on demand, and classify it as a current liability if it is. If nobody can trace how the balance arose, raise it with your CA before the audit rather than during it.

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