When faced with an urgent financial need, many investors consider selling their shares for instant liquidity. However, opting for a loan against shares is increasingly becoming a smarter, more strategic choice in India. This financial product allows you to leverage your shareholdings without losing ownership, providing funds at competitive rates while maintaining your stake in the stock market. In this article, we will explore why a loan against shares could be a better option than selling them, delve into the mechanics of a loan against shares interest rate, and discuss its many advantages for Indian investors.
Understanding loan against shares
A (LAS) is a secured loan where your equity shares act as collateral. Offered by banks and NBFCs, this facility converts your idle securities into instant working capital. You do not have to liquidate your shares, but simply pledge them to the lender.
Most financial institutions have a list of approved shares and offer up to 50-70% of the market value of the shares as a loan. The pledged shares continue to be held in your Demat account, but with a lien in favour of the lender until the loan is repaid.
How a loan against shares works in India
The process is simple and involves minimal paperwork:
1. You approach a lender and submit a request to pledge your eligible shares.
2. After verification, the lender creates a lien on your shares and disburses the approved loan amount to your account.
3. The loan can be repaid through flexible EMI or overdraft facilities.
4. On repayment, the lien is removed and you regain absolute control over your shares.
Lenders monitor the value of your pledged shares regularly. If there is a sharp fall, you may be required to pledge more shares or part-repay the loan.
Comparing selling shares vs. loan against shares
Many investors instinctively consider selling their shares in stressful financial situations. While selling gives immediate liquidity, it comes with drawbacks that can hamper long-term returns.
Immediate liquidity vs. future potential
Selling shares provides funds instantly, but you lose out on potential future growth and dividends. Shares could appreciate in value, and selling during downturns often means locking in losses.
In contrast, opting for a loan against shares ensures you get liquidity without exiting the market. You can benefit from capital gains and dividends even during the loan tenure.
Wealth compounding and asset retention
Stock investing is based on the principle of wealth compounding. Withdrawing from the market or intermittent selling disrupts this process, reducing the benefits of long-term growth.
A loan against shares keeps your investment portfolio intact. As the market rises, your net worth increases. Once you repay and close the loan, you reclaim a potentially more valuable asset.
Tax implications
Capital gains from selling shares, whether short-term or long-term, are taxable in India. Realising profits prematurely could increase your overall tax liability.
On the other hand, a loan against shares is not treated as income and thus not taxable. This ensures better tax efficiency for investors looking for liquid funds.
Advantages of loan against shares for Indian investors
Lower interest rates compared to unsecured loans
The loan against shares interest rate is generally lower than that of personal loans or credit cards, mainly because the loan is secured against a tangible asset. Typical rates range from 9% to 14% per annum, but can vary based on the lender, borrower profile, and quality of shares pledged.
For comparison, most personal loans in India are offered at 11% to 24% per annum, making LAS a more cost-effective alternative.
Flexible repayment and withdrawal options
Most Indian banks and NBFCs offer either overdraft or term loan facilities against shares. With overdraft, interest is charged only on the amount you use. You can repay and withdraw as per your convenience, making it highly flexible for both short-term and long-term needs.
Quick processing and minimal documentation
Lenders have digitised the loan against shares process. A loan can be sanctioned within 24-48 hours with basic KYC documents and a Demat account. There is no need to submit proof of income or undergo lengthy approval checks, which is especially beneficial for self-employed individuals.
Continued ownership and dividend income
Pledging shares does not transfer ownership to the lender. You remain the beneficiary owner, and continue to earn dividends, rights, and bonuses associated with the shares. Only the sale or transfer rights are mutually restricted during the loan tenure.
No end-use restriction
A loan against shares offers freedom of use. Whether it is medical emergencies, business expansion, children’s education, or any personal need, there are no questions asked about the use of proceeds.
Understanding the loan against shares interest rate
The loan against shares interest rate is a critical factor that affects your cost of borrowing. Here is how it works in India:
– Type of shares pledged: Blue-chip and large-cap stocks attract better rates, while lesser-known or volatile shares may command higher rates.
– Loan tenure: Shorter tenures generally have lower rates. Most lenders offer LAS for up to 12-36 months.
– Loan-to-value (LTV) ratio: Higher LTV may mean slightly higher interest since lender risk increases.
– Borrower profile: High-credit-score applicants with healthy financial profiles may negotiate better rates.
It is wise to compare the loan against shares interest rate across banks, NBFCs, and digital lenders before applying. Many top Indian banks such as HDFC Bank, ICICI Bank, and SBI offer competitive rates on LAS.
Risks and important considerations
While a loan against shares offers many benefits, there are risks that every investor should be aware of:
Stock market volatility
A sharp fall in share values may trigger a margin call, requiring you to pledge additional shares or part-repay the loan. If you cannot meet this condition, the lender reserves the right to sell pledged shares to recover dues.
Over-borrowing
Borrow only what you truly need, as the temptation of easy funds can lead to over-leverage. This can negatively impact your financial discipline and investment strategy.
Eligibility and lender terms
Not all shares are eligible for pledging. Check the approved list with your lender before proceeding. Read the fine print for charges such as processing fees, annual maintenance, and pre-closure penalties.
How to get the best loan against shares in India
To get the best value, keep these tips in mind:
– Compare lenders for loan against shares interest rate, LTV ratios, and processing charges.
– Opt for a lender who allows maximum flexibility in repayment and fund usage.
– Always pledge blue-chip, highly liquid shares where possible for best terms.
– Monitor your loan periodically and be prepared for margin calls.
Case study: loan against shares vs. selling shares
Let us consider an example:
Ravi holds shares in HDFC Bank and TCS worth Rs. 10 lakh. He needs Rs. 5 lakh urgently for his business. He has two choices:
– Sell some shares: He sells Rs. 5 lakh worth of shares, pays 10% LTCG tax (assuming more than one year holding), and loses potential future gains and dividends.
– Take a loan against shares: Ravi pledges his shares and gets a loan of Rs. 5 lakh at a 10% p.a. loan against shares interest rate. He continues to own the shares, earns dividends, and when his business grows, repays the loan in 12 months. If the shares rise in value, he gains both capital growth and business expansion.
Clearly, the LAS route preserves wealth and offers greater financial freedom.
When choosing a loan against shares makes sense
– You need funds temporarily and do not wish to disturb long-term investments.
– You want to maintain your equity exposure for future market gains.
– You need lower-cost funds than personal or business loans.
– You have idle shares in Demat and want to monetise them without selling.
How to apply for a loan against shares
Applying for a loan against shares is easy for most retail Indian investors:
1. Hold eligible shares in a Demat account.
2. Approach your bank or NBFC (for example, HDFC Bank, ICICI Bank, SBI, Bajaj Finserv).
3. Submit KYC and Demat account details.
4. The lender lists the shares as pledged, creates a lien, and credits the loan amount.
Alternatives to loan against shares
Additionally, investors can consider:
– Loan against mutual funds – similar to LAS, but mutual fund units are pledged.
– Loan against property – for much larger amounts, but with slower processing.
– Gold loan – fast but may have higher interest rates.
– Personal loan – unsecured, but comes at higher interest rates.
Each option has unique pros and cons, but a loan against shares offers the best blend of low interest and speed for those holding stocks.
Another alternative is a , which allows you to borrow funds by pledging your FD as collateral. This option offers low interest rates—usually just 1-2% above the FD rate—and faster processing compared to unsecured loans. It’s a suitable choice for conservative investors who prefer the safety of fixed returns over market-linked instruments like shares or mutual funds.
Conclusion
A loan against shares is a powerful, cost-effective tool for Indian investors looking for liquidity without selling their investments. With lower loan against shares interest rates compared to unsecured credit, ease of access, and continued asset ownership, it is often a smarter alternative to outright selling. For those seeking to unlock the value of their equity portfolio efficiently and maintain potential for long-term growth, availing a loan against shares is the preferred choice in the dynamic Indian financial landscape.
