📚 PASS Investment Adviser (Level 2) Difficulty: Beginner ℹ️ Info   ~5 min read
📌 Chapter 13.6 — Taxation in case of Stock Lending and Borrowing

Imagine you are reviewing the quarterly performance of a high-net-worth portfolio that has been underperforming its benchmark. While digging into the ledger, you notice a recurring income stream labeled ‘Lending Fees’ derived from a portfolio of blue-chip stocks that have been sitting idle. As a finance professional, your immediate task is not just to quantify this yield, but to determine how these inflows impact the client’s tax liability and, consequently, their net-of-tax return projections for the coming fiscal year.

In the Indian context, SLB fees are not viewed as capital gains because the underlying securities remain under the beneficial ownership of the lender despite the physical transfer. The Income Tax Act treats these fees strictly as revenue income. This means the fee is effectively taxed at the investor’s applicable slab rate. For an individual taxpayer, this could mean a significantly higher tax hit compared to long-term capital gains (LTCG) on equity, which are often taxed at a preferential concessional rate.

From a valuation perspective, ignoring the tax treatment of these fees can lead to a distorted assessment of the strategy’s efficiency. Consider a scenario where a portfolio earns a 3% gross annualized lending fee. If the investor is in the 30% tax bracket plus surcharge and cess, the effective post-tax yield collapses to approximately 2% or less. When building a wealth management model, failing to net out these taxes leads to an overestimation of the incremental alpha, which can cause disappointment when the client receives their tax computation statement.

For professional analysts, the classification of this income is also critical when determining whether to treat the fee as ‘Income from Other Sources’ or ‘Business Income.’ If the lending activity is frequent, systematic, and conducted with a profit-seeking motive, authorities may argue it constitutes business income. This distinction is vital because it allows the investor to deduct ’legitimate expenses’—such as transaction costs, custodial fees, or advisory charges related to the SLB program—directly against the lending income, potentially softening the tax impact. 1

Nuance

⚠️ Nuance
Candidates often mistakenly believe that because the SLB transaction itself is not a ’transfer’ under section 47(xv), the income derived from it should also enjoy a favorable capital gains tax treatment. This is a fundamental error; the tax neutrality of the transfer relates only to the principal shares, not the interest-like compensation generated by the lending process. Always distinguish between the capital asset’s movement and the revenue income generated by its deployment.

Check Your Understanding

Practice Question 1

An individual investor with a 30% marginal tax rate participates in an SLB transaction and earns ₹50,000 in lending fees. Assuming no deductible expenses, how is this income taxed under the Income Tax Act?

Practice Question 2

When can an investor deduct expenses incurred while participating in an SLB program from their lending fees?

This is a companion read for Section 13.6 — Taxation in case of Stock Lending and Borrowing from PASS Investment Adviser (Level 2) by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 Akhilesh Gururani. All rights reserved.

  1. Section 57 of the Income Tax Act allows for the deduction of any expenditure incurred for the purpose of making or earning ‘Income from Other Sources’, provided it is not of a capital nature. ↩︎