Stock Lending and Borrowing

A long-term investor's portfolio earns nothing while it sits in the demat account. Stock Lending and Borrowing rents it out.

The workbook's definition: a system wherein a person can lend his securities to a borrower through an approved intermediary for a specified period, on the condition that the borrower returns equivalent securities of the same type or class at the end of the period, along with all the corporate benefits that accrued during the borrowing — dividends included. It is a temporary lending, for a stipulated duration, for a certain fee. SEBI regulates it through the Securities Lending Scheme, 1997.

The reason it works at all is a single line in the Income Tax Act: lending under the scheme is not a transfer, so no capital gain arises on the way out or the way back.

Who and where. All market participants, retail and institutional, may lend and borrow through an Authorized Intermediary (AI). The clearing corporations of NSE and BSE are approved AIs. Trading happens on an automated, screen-based, order-matching platform independent of the other trading platforms.

What is eligible. Only securities traded in the F&O segment and liquid index ETFs.

Tenure. Contracts run from 1 day to 12 months, usually entered for one month. Rollovers are allowed, but the total duration including rollovers cannot exceed 12 months from the date of the original contract.

Margins. The lender deposits 25% of the lending price as margin — nil if the securities are lent on the transaction date itself. The borrower deposits 100% of the lending price, the lending fee, value-at-risk margins and extreme loss margins upfront, and daily mark-to-market thereafter. If the borrower fails to return the securities, the AI liquidates the collateral and buys equivalent securities from the market.

Tax in the lender's hands. Lending is not treated as an exchange, even where the lender does not get back the same distinctive certificate numbers. Under section 47(xv) it is not a transfer for capital gains purposes, and the department has confirmed that SLB-segment transactions are not treated as transfer. The fee is taxable as business income if the lender is in that business, otherwise as income from other sources, and the expenses of earning it are deductible.

Tax in the borrower's hands. The borrower sells the stock, so the gain or loss on that sale is capital gains or business income as the case may be. The lending fee paid is deductible in computing it.

From the workbook's Example 9. In December 2024 Mr A lends 10,000 shares of XYZ Ltd for one month and receives a lending fee of Rs 20 per share.

Lending fee        10,000 x Rs 20   = Rs 2,00,000
Less: transaction charges            = Rs    2,000
Taxable income                       = Rs 1,98,000

Taxed as business income if he is in that business, otherwise under income from other sources. No capital gain arises at any point — not when the shares leave his account in December, not when equivalent shares come back on the first Thursday of January 2025. Section 47(xv) keeps the whole round trip outside the capital gains net, and his original cost and holding period survive intact.

The workbook's companion case is the borrower's: Mr B borrows 10,000 shares of a stock trading at Rs 1,600 at a lending fee of Rs 5 per share, and short-sells the lot at Rs 1,600 — Rs 1.6 crore of proceeds — in anticipation of a fall. His Rs 50,000 fee is deductible against whatever he makes or loses on buying the shares back.

The lender's side is the one worth dwelling on for an adviser: a client holding Rs 1.6 crore of a large-cap he has no intention of selling earned Rs 2,00,000 in a month without disturbing his cost base, his holding period or his section 112A grandfathering.

Chapter 13 (Tax provisions for Special Cases), section 13.6, covers SLB from the SEBI framework through to the taxation of both sides. The examinable points are mechanical and factual: who the Authorized Intermediary is, the 12-month outer limit including rollovers, the 25% lender margin versus 100% borrower margin, and above all that lending is not a transfer under section 47(xv) while the fee is fully taxable.

• Lending is not a transfer; the fee is still income. Candidates who remember "no capital gain" often conclude "no tax". The fee is taxable in full.
• The fee is not capital gains. It is business income or income from other sources, at slab rates — never 12.5%.
• 12 months is the outer limit including rollovers, not 12 months per rollover.
• Lender 25%, borrower 100%. The asymmetry is deliberate and examinable; the lender pays nil if lending on the transaction date.
• Only F&O-segment securities and liquid index ETFs are eligible. Not any listed share.
• Corporate benefits go back to the lender. The borrower must return the dividends along with equivalent securities.
• Equivalent securities, not identical certificates. The absence of the same distinctive numbers does not make it an exchange.