Understanding Security Lending/ Borrowing and its Taxation

The Security lending and borrowing (SLB) scheme was launched by NSE clearing as an Approved Intermediary on 21st April 2008. SLB is a mechanism where lenders and borrowers can quote a lending fee and quantity at which they want to lend or borrow, and the order will be executed if the quotes match at the exchange. The security lending and borrowing can only be carried out with Approved intermediaries and are guaranteed by them, hence, they do not carry any counter-party risk.

The period of the contract is offered between one month to twelve months. The borrower has to return the same security to the lender on the expiry of the contract. The lender is eligible for all the corporate actions (if any) on such security during the contract period.

Benefits for the Lender:

An investor who wants to hold a security for a longer period can earn higher returns by lending those stocks for a shorter term as per the demand in the market over and above stock price appreciation.

For eg: If Mr. Akash is holding 1000 shares of company X and wants to hold them for a long term then he can lend it in the market as per demand and earn more return in the form of lending fees above stock price appreciation.

Benefits for the Borrower:

Borrowers are opportunists who are looking to earn profit by short selling positions, fulfilling physical delivery obligations, and arbitrage possibility between different exchanges, if they think the securities are overvalued/ undervalued on the market.

For eg: The stock of company X is trading at 1000 and the borrower is expecting the price to reduce to 950. Using SLB he can borrow 500 shares for an agreed fee and sell it at 1000 at a potential profit of INR 50*500 = 25000 less fees paid.

Tax on SLB:

The major issue from a tax point of view was whether this would be treated as a transfer of securities and would capital gain tax be levied or not. The CBDT has issued a circular which exempts Stock Lending and Borrowing transaction from the purview of STT, turnover fees, and capital gains tax. The transaction of lending of securities would not be treated as “Transfer” as per the Income Tax Act.

Taxation for Lenders:

  • The security lending is not liable for STT.
  • The borrowers will pay interest or fees to the lenders which will be taxable as business income or income from other sources in the hands of the lenders based on their intention. The tax rate applicable would be slab rates.
  • The lending fees charged would be taxable under GST.

Taxation for Borrowers:

  • At the time of short-selling the securities no tax is levied as the gain is unrealised, but when the securities are re-purchased to return to the lender the difference between sale value and purchase value would be taxed as capital gains or business income based on the intention of the trader.
  • The tax rate for short term capital gain is 15% (as the period of contract can be maximum for twelve months) and for Business income is slab rate.

PS: If the transaction is reported as business income then the lending fees paid to the lender can be claimed as a business expense.


Hello Bharti
For lenders I think there can be short term capital gain in certain situations in case borrower is unable to return the shares. Can you throw some light?