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Earning Passive Income Through Stock Lending: A Practical Guide

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  Published in Stocks and Investing on Thursday, November 20th 2025 at 2:05 GMT by Zee Business

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Earning Passive Income Through Stock Lending: A Practical Guide

Investing in the stock market is no longer a one‑way street. Besides capital appreciation and dividends, there are several side‑streams of revenue that savvy investors can tap into. One of the most underrated of these is stock lending – a regulated activity in India that lets you earn a fee simply by allowing other market participants to borrow the shares you own. The following overview synthesises the main points from Zeebiz’s article “How stock lending can help you earn passive income”, weaving in extra insights from linked resources that provide deeper context on the mechanics, benefits, risks and tax implications of this strategy.

1. What Is Stock Lending?

At its core, stock lending is a supply‑and‑demand arrangement. When a trader or a fund wishes to short‑sell a particular stock, they must first borrow those shares. The lender – usually a retail investor who already owns the shares – provides them to a broker, who then lends them to the short‑seller. In exchange, the broker pays the lender a lending fee, usually expressed as an annualised interest rate. Over time, this fee can turn into a notable passive income stream.

In India, the Securities and Exchange Board of India (SEBI) regulates this activity, and the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) provide the platforms for lenders to participate. The process is fully integrated into the settlement cycle – the lender’s shares are debited from their account at the time of lending and credited back once the borrower returns them.

2. Who Can Participate and How Do You Get Started?

Eligibility
Not every share is eligible for lending. To qualify, a stock must be:

• Highly liquid – typically from the NIFTY‑50, BSE‑SENSEX, or other large‑cap indices.
• Fully settled – the shares must have reached the “settlement” stage (T+2 in India).
• Listed on a regulated exchange – ensuring that all required disclosures and collateral safeguards are in place.

Retail investors who hold such shares can opt‑in to lending via their broker’s trading platform. For example, Zerodha’s Kite allows you to enable “Stock Lending” in the settings, after which the platform automatically lends your shares to short‑seller pools, provided the broker has a matching borrower.

Process (Zerodha example)

1. Log in to your Kite account.
2. Navigate to the “Stock Lending” tab.
3. Select the stocks you wish to lend and confirm the number of shares.
4. Opt‑in and confirm your acceptance of the terms.

Most brokers auto‑lend any shares you hold that meet the eligibility criteria once you opt‑in, so the process can be almost hands‑free. The article links to a dedicated “How to start stock lending with Zerodha” guide, which offers a step‑by‑step screenshot walkthrough for newcomers.

3. How Much Income Can You Expect?

Lending Rates
The annualised interest rate paid to lenders is not fixed; it fluctuates based on supply and demand. In periods of high short‑sale activity, rates can reach 10–12% per annum, while quieter times might see rates as low as 4–5%.

An illustrative example:

• Stock: TCS
• Shares Held: 10,000
• Price per Share: ₹4,000
• Total Value: ₹40 million
• Annualised Lending Rate: 10%

Annual income ≈ ₹4 million (before broker fees).

However, rates are variable, and you’ll receive the fee on a pro‑rated basis, usually monthly. Many brokers, like Zerodha, roll over the fee automatically into your account, making it truly passive.

Broker Fees
While the core lending fee is the major revenue source, some brokers charge a small fee (often a fraction of a percent) for providing the service. The net return, after broker fees, typically still remains attractive compared to other low‑risk passive income options.

4. Risks and Safeguards

Borrower Default
If the borrower fails to return the shares, the broker usually has collateral – cash or other securities – to cover the shortfall. The default penalty is enforced by the exchange, ensuring the lender’s shares are eventually returned. The probability of a default is low, especially with well‑regulated brokers, but it’s a risk that investors should recognise.

Dividend Loss
While a share is lent, you will not receive its dividend. If the stock pays a quarterly dividend and you have the shares lent out during that period, you forfeit that payout. The article links to a detailed explanation of dividend treatment in lending scenarios, noting that brokers typically credit the dividend to the lender’s account once the shares are returned.

Price Movements
You’ll eventually receive back the same number of shares you lent, but the market price may have changed. If you later decide to sell those shares, the price could be higher or lower than when you originally lent them out. In practice, this risk is minimal for long‑term investors who aren’t looking to time the market.

5. Tax Implications

Income from stock lending is treated as “Income from Other Sources” under Indian tax law. The lending fee, therefore, is taxed at the investor’s applicable slab rate. The article references the latest RBI circulars and SEBI guidelines on tax treatment, clarifying that no special deductions apply to lending income.

Additionally, the dividend income you might have missed while the shares were lent is still taxed at the applicable dividend tax rate, which may be lower than the ordinary income tax rate for certain taxpayers. This nuance is explored in a linked “Tax implications of dividend income while shares are lent” article.

6. Practical Tips for Maximising Returns

1. Diversify Across Stocks – Lend across multiple liquid equities to reduce concentration risk.
2. Monitor Rates – Keep an eye on the “lending rates” tab in your broker’s portal; rates can spike during market stress.
3. Stay Informed About Borrower Activity – Some brokers provide data on which stocks are being shorted most heavily; you can adjust your lending portfolio accordingly.
4. Re‑opt‑in When Needed – If you sell shares or your broker changes the lending policy, re‑opt‑in to keep the stream running.
5. Use Auto‑Lending Features – Most brokers offer an “auto‑lend” toggle that automatically lends any eligible shares, saving you manual effort.

7. Bottom Line

Stock lending transforms idle equity holdings into a steady passive income source, with the dual advantage of earning a fee while still retaining ownership of the shares. For investors who own large positions in liquid, high‑volume stocks, this can be a highly efficient way to boost overall portfolio returns. By opting in via a trusted broker, monitoring the rates, and staying aware of the risks (borrower defaults, dividend loss, and market price changes), you can add a new layer of revenue that requires minimal ongoing effort.

The Zeebiz article and its associated links paint a comprehensive picture: from the mechanics and eligibility criteria to the potential returns, risks, and tax considerations. With a little initial setup and continuous monitoring, stock lending offers a realistic, low‑effort passive income stream that many Indian investors are now leveraging to enhance their wealth‑building journey.