Loan Against Securities: Unlocking Investments for Cash

Loan Against Securities: Unlocking Investments for Cash

A Loan Against Securities (LAS) lets you borrow against shares, mutual fund units, bonds or life insurance policies without selling them. The lender marks a pledge on your demat holdings, extends an overdraft or term loan — typically up to 50% of equity value or up to 80–85% on debt instruments — and you draw only what you need, paying interest solely on the drawn amount. Your portfolio keeps compounding. In FY 2026-27, LAS remains one of India's most cost-efficient short-term liquidity tools, yet most investors never use it.

How a Loan Against Securities Actually Works

When you apply for LAS, you do not transfer ownership of your shares or fund units. Instead, you create a pledge on your demat account in favour of the lending institution. The mechanics follow a two-step sequence at the depository level.

Step 1 — Pledge creation. You instruct your Depository Participant (DP) — through CDSL's Easiest platform or NSDL's Speed-e — to mark a pledge on specified holdings in favour of the lender (the pledgee). For mutual fund units held in statement-of-account form, CAMS and KFintech each operate a separate pledge and lien facility.

Step 2 — Pledgee confirmation. The lender's back office confirms the pledge on the depository system, typically within two to four business hours. Once confirmed, an overdraft limit or term loan is sanctioned based on the loan-to-value (LTV) of the pledged basket.

From there, the overdraft works like a current account with a ceiling. You draw when you need funds, repay when cash flows allow, and interest accrues only on the daily outstanding balance. Most lenders allow partial drawdowns in tranches. The pledge is released — in full or in proportion — once the loan is repaid.

A critical distinction worth emphasising: you continue to receive dividends, mutual fund distributions and bond coupons on pledged securities. Capital appreciation also accrues to you. The lender holds only the pledge, not the economic ownership.

Eligible Securities and Loan-to-Value Ratios

Not every security in your portfolio qualifies, and the LTV the lender will offer varies significantly by asset class. Here is the practical picture for FY 2026-27:

What is typically excluded: penny stocks below the lender's market-cap threshold, close-ended schemes in lock-in, ELSS units within the mandatory three-year lock-in period, and unlisted securities.

The approved scrip list is not public and changes monthly. Verify with your specific lender before committing to a pledge basket, especially if your equity portfolio includes small- or mid-cap names that move in and out of approval.

SEBI and RBI Rules Governing LAS in 2026

Two regulators share jurisdiction over LAS, and their rules interact in ways that directly affect your borrowing limit, documentation and rights as a borrower.

SEBI's Pledge Framework

SEBI's 2020 circular on the pledge and re-pledge mechanism fundamentally changed how securities margins operate. Under the current framework, pledges are created through the depository's own pledge system — not a physical or beneficial transfer of securities to the lender. This protects you: pledged securities remain visible in your demat account, properly segregated, and the lender cannot re-hypothecate them to a third party without your explicit written consent.

On margins, SEBI requires that for loans against listed shares, a minimum 50% margin must be maintained at all times. In plain terms, your outstanding loan cannot exceed 50% of the current market value of pledged shares at any point during the loan period. If a lender quotes "50% LTV," that is the regulatory ceiling, not a generous offer.

RBI's Prudential Norms for Lenders

For scheduled commercial banks, the Reserve Bank of India prescribes that loans against securities must comply with applicable prudential norms and any per-borrower or per-category directions issued from time to time. Before signing any digital LAS agreement, you are entitled to receive a Key Fact Statement (KFS) — mandated under RBI's Digital Lending Guidelines 2022 — which must disclose the Annual Percentage Rate (APR), all fees and the exact margin-call trigger level. Read it.

NBFCs offering LAS are governed by the RBI Master Direction for Non-Banking Financial Companies. For larger loan amounts, the NBFC must register the pledge with CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India).

GST on Processing Fees

Processing fees and annual maintenance charges levied by the lender attract GST at 18% as a financial service. This is a pass-through cost to you as the borrower and is generally not input-tax-creditable unless the loan is used for a GST-registered business purpose and the conditions of Section 16 of the CGST Act 2017 are met. Always factor this into your all-in cost calculation when comparing LAS against alternatives.

Step-by-Step: Getting a LAS Today

Most large banks and NBFCs now offer fully digital LAS flows. Here is how the process looks end to end:

1. Check the approved securities list. Download the lender's scrip or fund list from their website. Identify which of your holdings qualify and at what LTV.
2. Estimate your eligible limit. Apply the relevant LTV percentage to the current market value of each qualifying holding. For a mixed portfolio, calculate equity and debt baskets separately and aggregate.
3. Submit the application. Complete the online form — PAN, Aadhaar-linked bank account, demat account details. Video KYC is accepted by most regulated lenders.
4. Authenticate the pledge instruction. You will receive an OTP or a TPIN from CDSL or NSDL to authenticate the pledge instruction through the depository's portal. Never share your TPIN with anyone, including the lender's representative — this is the single most important fraud-prevention step.
5. Pledgee confirmation. The lender confirms the pledge on the depository system, typically within two to four business hours on a working day.
6. Account activation. An overdraft account is activated and funds are available to draw via NEFT, IMPS or directly from the overdraft account.
7. Monitor daily. Log in to both your demat and loan accounts regularly. Set SMS or email alerts at 40% drawdown of current portfolio value so you have early warning before a formal margin-call notice.

Documents typically required: PAN card, Aadhaar, demat account statement for the last three months, recent Consolidated Account Statement (CAS) from CAMS or KFintech for mutual fund units, and income proof if the lender requires it for sanctions above a threshold.

Worked Example: Rs. 50 Lakh Equity Portfolio

Let us build a concrete scenario. Rohan, a finance professional, holds Rs. 50 lakh in a diversified large-cap equity portfolio and needs Rs. 15 lakh for a property down payment within ten days — without selling shares and without crystallising capital gains.

Setup:

• Pledged equity (all securities on approved list): Rs. 50,00,000
• LTV offered by bank: 50%
• Sanctioned overdraft limit: Rs. 25,00,000
• Amount Rohan actually draws: Rs. 15,00,000
• Interest rate: 10.75% p.a. (floating, repo-linked lending rate)

Monthly interest cost: Rs. 15,00,000 × 10.75% ÷ 12 = Rs. 13,438 per month

Rohan repays after four months when a fixed deposit matures. Total interest paid ≈ Rs. 53,750.

The comparison that makes LAS compelling: Had Rohan sold the shares instead — originally purchased two years ago at Rs. 30 lakh — his long-term capital gain (LTCG) would have been Rs. 20 lakh. With the Rs. 1.25 lakh LTCG exemption and LTCG rate of 12.5% applicable for AY 2027-28, his tax bill would have been approximately Rs. 18,75,000 × 12.5% = Rs. 2,34,375 — more than four times the LAS interest cost over four months, with no reinvestment friction.

The Margin-Call Scenario for Rohan

Now assume the equity market corrects 30% during his four-month window.

• Portfolio value falls to: Rs. 50,00,000 × 70% = Rs. 35,00,000
• New 50% LTV ceiling: Rs. 17,50,000
• Rohan's outstanding: Rs. 15,00,000

Because he drew well below the limit, he still has Rs. 2.5 lakh of headroom — no margin call triggered. Had he borrowed the full Rs. 25 lakh:

• Outstanding: Rs. 25,00,000
• New LTV ceiling after 30% market fall: Rs. 17,50,000
• Margin shortfall requiring top-up or partial repayment: Rs. 7,50,000 within 24–72 hours

That single comparison explains why discipline around drawdown percentage is the most important LAS risk-management decision you will make.

The Margin Call: What Triggers It and How to Respond

A margin call is not a polite suggestion — it is a contractual notice with a hard deadline. When the market value of your pledged securities falls such that your outstanding loan breaches the lender's margin threshold (typically triggered at 55–60% loan-to-current-value, before the regulatory 50% floor is breached), the lender issues a formal margin-shortfall notice.

You typically have 24 to 72 hours to respond by:

• Pledging additional approved securities to restore the LTV ratio
• Depositing cash into the overdraft account to reduce the outstanding balance
• Partially repaying the principal drawn

If you do not respond within the notice period, the lender has the contractual and legal right to sell your pledged securities at prevailing market prices — without seeking further permission. This is called invocation of the pledge. Two consequences that most borrowers overlook:

1. Capital gains tax is triggered on the invoked sale. The resulting capital gains are taxable in your hands in the year the pledge is invoked and securities are sold — even though the sale was not your decision. The lender will issue a contract note, and the gain will appear in your AIS (Annual Information Statement) for the relevant assessment year.

1. Loss of the long-term holding period. If pledged shares were approaching the 12-month mark for LTCG eligibility, invocation before that date converts the gain to a short-term capital gain taxable at 20% (STCG rate for listed equity for AY 2027-28) rather than 12.5%.

Practical buffer rule: Keep your drawn balance at or below 35–40% of the current market value of pledged securities. This creates a 10–15 percentage-point cushion before the lender's margin-call threshold.

Tax Treatment of LAS Interest (FY 2026-27 / AY 2027-28)

The deductibility of LAS interest under the Income-tax Act 1961 depends entirely on what you do with the borrowed money — not how the loan is structured.

When LAS Interest Is Deductible

Business use — Section 36(1)(iii): If you are a proprietor or a partner and the loan proceeds are deployed as business working capital or to fund business expenses, interest paid is fully deductible against your business income. You must maintain a clear paper trail: the loan credit should flow into your business current account, and application of those funds toward business expenses or inventory must be documented in your books.

Income from other sources — Section 57: If the borrowed funds are reinvested in an asset generating taxable income classified under "other sources" (for example, lent further at a higher rate under a documented arrangement), the interest paid on the LAS is deductible against that income. This is a narrow exception and requires careful, contemporaneous documentation.

House property — Section 24(b): If LAS proceeds are used to purchase or construct a property that you declare as let-out or deemed let-out, the interest may be deductible under Section 24(b), subject to the applicable annual cap. That said, a direct home loan is typically easier to document and often available at a lower rate — use LAS for property purchase only as a short bridge, not as the primary financing vehicle.

When LAS Interest Is Not Deductible

If borrowed money is applied to personal consumption — a wedding, medical treatment, a holiday, a consumer purchase — the interest is not deductible under any provision. Treat it as a pure cash outflow when assessing whether LAS makes sense.

Interest on funds used to purchase further equity shares for investment is also not deductible. Capital gains income is computed under Section 48, which does not permit deduction of financing costs as a cost of acquisition. This position is well-settled in case law. Do not borrow via LAS to buy more equities and expect an interest deduction.

Common Mistakes That Cost Borrowers Money

1. Drawing at the maximum sanctioned limit. The lender offers 50% LTV, you borrow 50%. A 10% market correction immediately triggers a margin call. The sanction is a ceiling; your drawdown should be a floor of caution.

2. Using LAS to fund further market speculation. This creates double leverage: your portfolio falls in value and your borrowing cost compounds simultaneously. If the lender invokes the pledge at the worst moment, losses are irreversible.

3. Ignoring the approved scrip list. Small- and mid-cap stocks are frequently dropped from approved lists. If a pledged scrip is removed, the lender reassigns it zero LTV — causing an instant margin shortfall even if the stock's market price is unchanged.

4. Pledging ELSS units in the lock-in period. Some lenders accept ELSS pledges for documentation purposes but assign zero LTV to units in the mandatory three-year lock-in. Borrowers who assume these units are working collateral get a rude surprise when their margin is calculated.

5. Incorrectly claiming a Section 57 deduction for personal-use LAS. Filing a deduction for interest on a loan used for personal expenses is an unsustainable position. An Assessing Officer reviewing your AIS will see both the loan and the securities transactions; a mismatch invites scrutiny and potential disallowance with interest under Sections 234B and 234C.

6. Comparing only interest rates, not APRs. The KFS will show processing fees (with 18% GST), CERSAI registration charges, annual renewal fees and any bundled insurance premium. Two lenders quoting 10.5% p.a. may have APRs that differ by 1–2% once all charges are included.

7. Neglecting to monitor during a volatile market. LAS is a living liability. A lender's margin-call notice can arrive on a weekend or during a sharp intraday fall. If you are unavailable for 72 hours, the lender may invoke the pledge. Set automated alerts and keep a cash reserve available.

Key Takeaways

• LAS is a pledge, not a sale. Your securities remain in your demat account throughout. Dividends, bonus shares, NAV appreciation and bond coupons continue to accrue to you.

• SEBI caps equity LTV at 50%. For listed shares, the regulatory floor requires a minimum 50% margin, meaning 50% LTV is the hard ceiling — not a special offering. Debt instruments and G-Secs attract higher LTVs.

• Draw 35–40% of current portfolio value, not 50%. This buffer absorbs a meaningful market correction before a margin call is triggered. The worked example above shows why the last 10 percentage points of sanctioned limit are the most dangerous to use.

• Invocation by the lender triggers capital gains tax in your hands. Even though you did not choose to sell, the tax liability — and potentially the loss of LTCG status — is yours. This makes timely margin-call response critical.

• Interest deductibility follows the use of funds, not the loan structure. Business use (Section 36(1)(iii)) and qualifying income-producing use (Section 57) are the two legitimate deduction routes. Personal-use LAS interest is a non-deductible cost.

• Compare all-in APR, not headline rates. Processing fees, 18% GST on fees, CERSAI charges and annual renewal costs all feed into your true cost of borrowing. The KFS your lender is required to provide gives you this number.

• LAS beats selling only when the numbers work. If your expected return on pledged securities over the borrowing period exceeds your net LAS cost — and your drawdown is disciplined — LAS creates value by preserving compounding. If markets are uncertain or the loan tenure extends beyond a year without a clear repayment plan, recalculate regularly.