In a pre-Budget bonanza to the capital markets, the Finance Ministry on Wednesday said lending and borrowing of securities for short-selling at stock exchanges will not attract Securities Transaction Tax or capital gains tax.

In a circular, which has not been made public in view of the Budget presentation on Friday, the Central Board of Direct Taxes (CBDT) said lending and borrowing of securities under the new scheme notified by market regulator Sebi will not be subject to STT and capital gains taxes, sources said.

Short-selling is a transaction where an investor can sell stocks without owning them. The investor does this by borrowing stocks from another entity, selling them in the market and then buying them back before the market closes to return the same to the lender.

Sources, however, clarified that only lending and borrowings of securities will be exempted, while the gains arising out of such transaction will be taxed as per provisions of the Income Tax Act.

Lending and borrowing of securities will not be regarded as transfer for the purpose of capital gains as per the provisions of the Income Tax Act, sources said.

The circular, according to them, also makes it clear that STT will not be applicable on such transactions.

Sebi and the RBI recently decided to put in place a full-fledged securities lending and borrowing scheme for all market participants in the securities market under the overall framework of Securities Lending Scheme, 1997.