MTF on Zerodha
The Margin Trading Facility (MTF) on Zerodha allows investors to buy equity shares in the cash segment using leverage, meaning the investor contributes a portion of the trade value (the margin) and borrows the remainder from Zerodha. Unlike intraday MIS positions that must be squared off by the end of the trading session, MTF positions can be held for multiple days, weeks, or months while interest accrues on the funded amount. MTF is governed by SEBI’s Margin Trading Facility Guidelines and is available on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
MTF positions are distinct from delivery CNC positions. MTF-funded shares are pledged to Zerodha as security for the loan; the shares are in the investor’s demat account but are encumbered until the loan is repaid.
Regulatory framework
SEBI Margin Trading Facility Guidelines
SEBI introduced the Margin Trading Facility through Circular SEBI/MRD/SE/Cir-09/2004 and has subsequently revised the framework multiple times. The current framework is governed by SEBI Circular SEBI/HO/MRD2/DCAP/P/CIR/2021/5 and its amendments. Key provisions:
- Only SEBI-registered stock brokers can offer MTF; they must have a minimum net worth of Rs 3 crore.
- Eligible securities for MTF are those in the F&O permitted list and Group 1 stocks (as defined by SEBI’s framework for margin trading), subject to broker-level restrictions.
- The maximum leverage ratio for MTF is not fixed by SEBI as a blanket rule; instead, SEBI mandates that the broker collect at least the prescribed initial margin (typically 50% of purchase value for most eligible stocks, subject to SPAN-based calculations).
- Funded amounts must be supported by approved collateral pledged by the client.
- Brokers must report MTF positions to the exchange on a daily basis.
Eligible securities
SEBI defines MTF-eligible securities as:
- Stocks included in the F&O segment (the permitted securities list on NSE Derivatives).
- Group 1 stocks (high-liquidity, low-volatility stocks approved by SEBI for enhanced trading).
Zerodha publishes its MTF eligible securities list on the Zerodha website, which may be a subset of SEBI’s broader eligible list based on Zerodha’s own risk assessment.
How MTF works on Zerodha
Activating MTF
MTF must be separately activated in the Zerodha account. Investors navigate to the MTF section (within Kite or Console) and accept the MTF agreement terms, which include risk disclosures mandated by SEBI.
Placing an MTF order
On Kite, MTF orders are placed under the product code MTF (distinct from CNC, MIS, or NRML). When placing an MTF order:
- The investor specifies the quantity and price.
- Kite calculates the margin required (investor’s contribution) and the funded amount (Zerodha’s loan).
- The investor must have sufficient free margin (cash or approved collateral) to meet the margin requirement.
- On execution, shares are purchased. The funded portion is debited from Zerodha’s account to the clearing corporation; the shares are credited to the investor’s demat account but are immediately pledged back to Zerodha as security.
Collateral for MTF margin
The investor’s margin contribution can be:
- Cash in the trading account.
- Approved securities (shares, mutual fund units) pledged to Zerodha through the standard pledge mechanism. A haircut applies to pledged securities.
MTF cannot be funded using existing CNC delivery shares in the demat account without first pledging them.
Interest charges
Zerodha charges daily interest on the outstanding funded amount (loan). The interest rate (as of 2025) is approximately 0.05% per day, which is equivalent to approximately 18% per annum. This rate varies and is published by Zerodha on its website.
Interest is calculated daily and deducted from the investor’s ledger (trading account cash balance) or added to the outstanding loan. If the ledger balance becomes insufficient, Zerodha may send a margin call.
| Interest calculation example | |
|---|---|
| Funded amount (loan) | Rs 1,00,000 |
| Daily interest rate | 0.05% |
| Interest per day | Rs 50 |
| Monthly interest (30 days) | Rs 1,500 |
| Annual interest (365 days) | Rs 18,250 |
Margin shortfall and forced liquidation
If the value of the MTF-funded shares falls such that the margin coverage ratio drops below the maintenance margin (typically 50% of current market value), Zerodha issues a margin call. If the investor does not top up the margin within the specified time (typically one business day), Zerodha’s RMS team liquidates the MTF positions.
Forced liquidation in MTF:
- Positions are sold in the market at prevailing prices, regardless of whether the investor wants to sell.
- The sale proceeds first repay the funded loan amount plus accrued interest.
- Any residual proceeds are credited to the investor’s ledger.
- If sale proceeds are insufficient to cover the loan (happens in sharp market declines), the investor’s other account balances may be debited to cover the shortfall.
Comparison with intraday MIS
| Feature | MTF | MIS (intraday) |
|---|---|---|
| Holding period | Multi-day (until repaid or liquidated) | Intraday only; auto-squared same day |
| Interest | Yes (daily) | No (positions closed same day) |
| Leverage | Up to 50% investor contribution (varies) | Higher (up to 5x for large caps) |
| Shares delivered to demat | Yes (pledged) | No (settled cash) |
| Product code | MTF | MIS |
| LTCG eligibility | Yes (if held 12+ months after full repayment and free hold) | No |
MTF and capital gains
Shares bought under MTF and held for more than 12 months may qualify for LTCG treatment (10% tax rate on gains above Rs 1 lakh). However, the holding period and the pledged status interact with the cost of acquisition calculation. The cost of acquisition for capital gains purposes includes the full purchase price (not just the investor’s margin contribution), but the interest paid on the loan is generally not deductible as a capital gains expense (interest on borrowed funds for investment is deductible as “Income from Other Sources” expense under Section 57(iii) or as business expense under Section 36(1)(iii) depending on the investor’s classification).
Interest expense deductibility
Interest paid on MTF loans may be deductible:
- If the investor’s share transactions constitute a business (frequent trader), interest is deductible as a business expense under Section 36(1)(iii).
- If the investor’s transactions are for investment (capital gains), interest may be deductible against dividend income under Section 57 but cannot be set off against capital gains.
Investors should consult a tax adviser to determine the appropriate treatment based on their trading frequency and classification.
Brokerage and charges for MTF orders
| Charge | Amount |
|---|---|
| Brokerage | Zero (MTF buy treated as delivery) for the initial purchase |
| STT | 0.1% of turnover (same as delivery) |
| DP charge on sell | Rs 13.5 per ISIN per day |
| Interest | Daily (typically 0.05% per day on funded amount) |
| Pledge/unpledge charge | Applicable as per CDSL rates |
Risks of MTF
- Amplified losses: Leverage amplifies losses as well as gains. A 10% decline in a stock with 50% margin results in a 20% loss on the investor’s contribution.
- Forced liquidation risk: Margin shortfalls trigger automatic sales at potentially unfavourable prices.
- Interest cost drag: Sustained positions accumulate interest that erodes returns. A stock must generate returns above the interest rate (approximately 18% per annum) for MTF to be profitable purely on leverage economics.
- Concentration risk: MTF is typically used for a smaller number of positions, increasing concentration.
References
- SEBI Circular SEBI/HO/MRD2/DCAP/P/CIR/2021/5, Revised MTF framework.
- SEBI Circular SEBI/MRD/SE/Cir-09/2004, Original MTF guidelines.
- Income Tax Act, 1961, Sections 36(1)(iii), 57(iii), 111A, 112A.
- NSE, F&O permitted securities list (eligible for MTF).
- CDSL, Pledge and unpledge charge schedule.