How wealthy investors use Lombard Lending to defer Capital Gains Tax: Borrowing against shares rather than selling them

Some wealthy investors raise money without selling shares that have gained value. Instead, they borrow against those shares, delaying the capital gains tax that would be triggered by selling.

Globally, this practice is called Lombard lending, a product rooted in private banking. In India, similar products are called loans against shares or securities.

Investors pledge their shares to a bank or a non-banking financial company. The shares remain in their names, allowing them to retain dividends and voting rights.

Borrowing itself does not constitute a sale, so capital gains tax is not triggered. However, the loan must eventually be repaid, along with interest.

Lenders generally offer loans worth around 50% to 60% of the pledged shares’ value. Some lending guides give different limits, making the applicable terms important.

Small and mid-cap shares may qualify for loans worth only 30% of their value. Interest rates generally range between 9% and 12%, with interest paid monthly.

Here’s an example

Suppose shares worth ₹1 crore include gains of ₹60 lakh. Selling all these shares would create an estimated tax bill of ₹7.6 lakh. This assumes the shares qualify for long-term capital gains treatment.

The example uses a 12.5% Long-Term Capital Gains (LTCG) tax rate and an annual ₹1.25 lakh exemption. It also includes a 4% cess. Listed shares qualify for this treatment when held for more than 12 months.

Alternatively, the investor could borrow ₹50 lakh at 10% interest. That would cost ₹5 lakh in interest annually. Under these assumptions, borrowing costs less than selling, with repayment within roughly 18 months. The comparison excludes returns earned on the shares retained.

The strategy delays tax rather than removing it permanently. In America, inherited assets can be reassessed at a new cost that wipes out earlier gains. India has no similar step-up for inherited shares. Although inheritance itself is not taxable, heirs generally retain the previous owner’s purchase cost. The accumulated gain becomes taxable when they sell.

When share prices fall

Falling share prices pose another danger: a margin call. Lenders may require additional collateral or a partial repayment when pledged shares lose value.

Failure to comply can lead lenders to sell those shares. Such forced sales can lock in losses during difficult market conditions.

Interest payments also require cash and may force investors to sell other assets. Interest may not be deductible when borrowing is unrelated to the purchase of shares.

This approach, therefore, suits temporary cash needs and is supported by a clear repayment plan. Professional tax guidance remains especially important before borrowing.