A loan against shares is an increasingly popular financing option in India that allows investors to unlock liquidity from their equity portfolio without selling their holdings. In simple terms, you pledge your shares, exchange-traded funds (ETFs), or select mutual funds as collateral and receive a loan—typically a percentage of the market value of those securities. This facility helps investors meet short-term funding needs while remaining invested in the market, preserving long-term wealth creation potential. With growing awareness, digitisation, and competitive lending rates, loan against shares has emerged as a practical alternative to personal loans and other unsecured borrowing options.
At a time when markets are volatile and long-term investing is critical for wealth creation, selling shares to meet temporary cash needs can disrupt financial plans and trigger unnecessary capital gains tax. A loan against shares solves this problem by offering liquidity without liquidation. The borrower continues to enjoy dividends, bonuses, and long-term appreciation (subject to market movements), while the lender holds a pledge on the securities as collateral.
What Is a Loan Against Shares?
A loan against shares—also known as loan against securities (LAS)—is a secured loan where listed equity shares, ETFs, bonds, or mutual fund units are pledged to a lender in exchange for funds. The loan amount is usually a percentage of the pledged portfolio’s market value, known as the loan-to-value (LTV) ratio. Because the loan is secured, interest rates are typically lower than unsecured personal loans, and approval is faster.
Banks and non-banking financial companies (NBFCs) offering this product operate under regulations issued by the Reserve Bank of India, which prescribes prudential norms such as maximum LTV limits and risk management requirements. This regulatory oversight adds a layer of safety and standardisation to the product.
How Loan Against Shares Works in Practice
The process of availing a loan against shares begins with the borrower identifying eligible securities in their demat account. Not all shares qualify; lenders maintain an approved list based on liquidity, volatility, and market capitalisation. Once the borrower applies, the lender evaluates the portfolio and determines the eligible loan amount based on the prevailing LTV ratio—often between 40% and 60% for equity shares.
After approval, the borrower pledges the shares electronically through the depository system. Ownership remains with the borrower, but the lender gains the right to liquidate the securities if the borrower defaults or if margin requirements are breached due to market movements. Funds are then disbursed, often within a few hours to a couple of working days.
Key Objectives and Use Cases of Loan Against Shares
The primary objective of a loan against shares is to provide quick liquidity without disturbing long-term investments. Borrowers commonly use this facility for business working capital, emergency expenses, education fees, medical costs, or even to bridge short-term cash flow gaps. Entrepreneurs and traders also use loans against shares to seize time-sensitive opportunities without selling strategic investments.
Another important use case is tax efficiency. Selling shares may trigger short-term or long-term capital gains tax, depending on the holding period. By opting for a loan instead, investors can avoid immediate tax outgo while meeting their funding needs.
Eligibility Criteria for Loan Against Shares
Eligibility for a loan against shares is generally straightforward. The borrower must be a resident Indian individual, HUF, or eligible corporate entity with a demat account holding approved securities. Lenders may assess the borrower’s credit profile, but since the loan is secured, credit score requirements are often more flexible compared to unsecured loans.
The quality and liquidity of the pledged shares play a crucial role in determining eligibility. Blue-chip stocks and index ETFs typically attract higher LTV ratios, while mid-cap or volatile stocks may either be excluded or attract lower funding limits.
Securities Eligible for Loan Against Shares
Most lenders accept a wide range of securities, including listed equity shares, ETFs, government bonds, and select debt or equity mutual funds. However, eligibility is not uniform across lenders. Shares with low trading volumes, high volatility, or regulatory restrictions may be excluded. Mutual fund eligibility usually depends on the fund’s category, liquidity, and historical performance.
It is important for borrowers to review the lender’s approved security list before applying to avoid delays or rejection.
Loan-to-Value (LTV) Ratio Explained
The LTV ratio determines how much loan you can get against your pledged securities. For example, if your shares are valued at ₹10 lakh and the LTV is 50%, the maximum loan amount would be ₹5 lakh. Regulatory guidelines issued by the Reserve Bank of India cap the LTV for loans against shares to manage systemic risk, and lenders may impose stricter internal limits based on market conditions.
LTV ratios are dynamic and can change if the market value of pledged shares fluctuates. A sharp market fall may reduce the collateral value, triggering a margin call, requiring the borrower to provide additional collateral or repay part of the loan.
Interest Rates on Loan Against Shares
Interest rates on loans against shares are generally lower than personal loans because of the secured nature of the facility. Rates vary based on the lender, type of securities pledged, loan amount, and borrower profile. Typically, rates range from 9% to 14% per annum, which can be significantly cheaper than unsecured credit options.
Some lenders offer flexible interest structures, including overdraft-style facilities where interest is charged only on the utilised amount, making it cost-effective for borrowers with fluctuating cash needs.
Tenure and Repayment Options
Loan against shares usually comes with flexible tenures, ranging from a few months to several years. Repayment options may include regular EMIs, bullet repayment at the end of tenure, or overdraft-style repayment where the borrower can repay and redraw funds as needed within the sanctioned limit.
This flexibility makes loan against shares particularly attractive for business owners and professionals who need short-term liquidity without committing to rigid repayment schedules.
Risks Associated with Loan Against Shares
While loan against shares offers multiple benefits, it is not risk-free. The biggest risk is market volatility. A sharp decline in share prices can erode collateral value, leading to margin calls or forced liquidation by the lender. This can result in permanent loss of shares at unfavourable prices.
Another risk is over-leveraging. Borrowing excessively against volatile assets can strain finances if markets move adversely. Borrowers should use this facility conservatively and avoid using it for speculative investments.
Margin Calls and How They Work
A margin call occurs when the value of pledged securities falls below the required maintenance margin. In such cases, the lender may ask the borrower to pledge additional securities or repay part of the loan within a specified timeframe. Failure to comply can lead to liquidation of the pledged shares.
Understanding margin call mechanics is critical. Borrowers should maintain a buffer by borrowing below the maximum eligible limit and monitoring portfolio value regularly.
Tax Implications of Loan Against Shares
One of the advantages of loan against shares is that borrowing does not attract tax, as loan proceeds are not considered income. Since shares are not sold, there is no capital gains tax at the time of borrowing. However, interest paid on the loan is generally not tax-deductible for personal use, though it may be deductible for business purposes subject to tax laws.
If shares are eventually liquidated by the lender due to default, capital gains tax implications may arise based on holding period and sale price.
Loan Against Shares vs Personal Loan
Compared to personal loans, loan against shares offers lower interest rates, higher loan amounts for eligible portfolios, and faster processing. However, personal loans do not carry the risk of collateral liquidation. The choice depends on the borrower’s risk appetite, urgency, and willingness to pledge investments.
For investors with a strong equity portfolio, loan against shares often emerges as the more cost-effective option.
Loan Against Shares vs Selling Shares
Selling shares provides immediate liquidity without interest costs but permanently exits the investment, potentially missing out on future gains. It may also trigger capital gains tax. A loan against shares preserves ownership and long-term investment strategy, though it involves interest cost and market risk.
The decision should be based on the duration of cash need, market outlook, and tax considerations.
Who Should Consider a Loan Against Shares?
Loan against shares is suitable for investors with a diversified, high-quality equity portfolio who need short-term or medium-term liquidity. It is ideal for business owners, professionals, and high-net-worth individuals who want to avoid selling long-term investments. Conservative investors or those uncomfortable with market volatility should approach this facility cautiously.
How to Apply for a Loan Against Shares
Applying for a loan against shares is largely digital today. Borrowers can apply through banks or NBFC platforms by submitting basic KYC documents and authorising access to their demat holdings. Once eligible securities are identified, the pledge is created electronically, and funds are disbursed quickly.
Most lenders offer online dashboards to track loan balance, collateral value, and margin requirements in real time.
Documentation and Process Simplicity
Documentation for loan against shares is minimal compared to traditional loans. KYC documents, demat account details, and pledge authorisation are usually sufficient. The simplicity and speed of the process make it a preferred choice for urgent funding needs.
Regulatory Framework and Investor Protection
Loan against shares is regulated under guidelines issued by the Reserve Bank of India, which sets exposure limits, margin requirements, and reporting norms for lenders. This regulatory oversight protects both borrowers and the financial system from excessive risk.
Investors should always choose reputed banks or NBFCs and carefully read loan agreements, especially clauses related to margin calls and liquidation rights.
Common Mistakes to Avoid
One common mistake is borrowing the maximum eligible amount, leaving no buffer for market volatility. Another is using the loan proceeds for speculative trading, which increases risk. Ignoring margin calls or failing to monitor portfolio value can also lead to forced liquidation.
Prudent planning and conservative borrowing are key to using loan against shares effectively.
Role of Loan Against Shares in Financial Planning
When used responsibly, loan against shares can be a powerful financial planning tool. It provides liquidity, preserves investments, and offers flexibility. As part of a broader financial strategy, it can help manage cash flows without derailing long-term goals.
However, it should complement—not replace—emergency funds and other risk-management measures.
Future Outlook of Loan Against Shares in India
With increasing participation in equity markets and growing financial literacy, loan against shares is expected to gain wider adoption in India. Digital platforms, real-time risk management, and competitive pricing are making the product more accessible and transparent.
As regulatory frameworks evolve and investors become more sophisticated, loan against shares is likely to play a larger role in personal and business finance.
Conclusion
A loan against shares is a smart, flexible, and cost-effective way to access liquidity without selling your long-term investments. Backed by regulatory oversight from the Reserve Bank of India, this secured lending option offers lower interest rates, quick processing, and tax efficiency compared to many alternatives. However, it comes with market-linked risks that require careful monitoring and disciplined borrowing.
For investors who understand these risks and use the facility judiciously, loan against shares can be a valuable financial tool—one that bridges short-term cash needs while keeping long-term wealth creation intact.