A Simple Guide to Calculating Interest in Margin Trading

October 27, 2025October 27, 2025

71 Views

Trading in the stock market is exciting, but one common hurdle many investors face is limited capital. That’s where Margin Trading Facility (MTF) comes in – allowing you to borrow funds from your broker and take bigger positions than your available cash would normally permit.

But here’s the catch: margin trading isn’t free. Like any loan, it comes with an interest cost on the borrowed amount. If you don’t calculate this cost properly before investing, it can eat into your profits or even turn a winning trade into a loss.

What is Interest in Margin Trading?

When you use Margin Trading Facility (MTF), your broker funds a part of your trade. In return, you pay a daily interest on the borrowed amount until you close the position.

For example, if you want to buy stocks worth ₹1,00,000 but only have ₹40,000, your broker funds ₹60,000. That ₹60,000 is like a loan, and you’ll be charged interest on it for the period you hold your position.

How Do Brokers Calculate Interest on Margin Trading?

Most brokers calculate interest on a daily basis, charged on the borrowed portion (not your own capital).

Here’s the step-by-step formula:

Interest Payable = (Borrowed Amount × Annual Interest Rate ÷ 365) × Number of Days

Key Points:

Interest is charged only on the funded amount (not your total investment).
Even if you hold for just one day, daily interest applies.
Different brokers may have different rates (e.g., 12%–18% p.a.)

Example: Calculating Interest in Margin Trading

Let’s assume:

Investment needed = ₹1,00,000
Your capital = ₹34,000
Broker funding = ₹66,000
Annual interest rate = 14.99% p.a.
Holding period = 5 days

Step 1: Find the daily interest rate
14.99% ÷ 365 = 0.0411% per day

Step 2: Calculate daily interest on borrowed amount
₹66,000 × 0.0411% = ₹27.126 per day

Step 3: Calculate total interest for 5 days
₹27.126 × 5 = ₹135.63

So, if you hold this margin position for 5 days, your total interest cost is ₹135.63.

Factors That Impact Interest in Margin Trading

Borrowed Amount – The higher the funding, the higher the interest payable.
Broker’s Interest Rate – Varies by broker (Navia offers competitive MTF rates starting from ₹20/day for ₹50,000*.)
Holding Period – Longer you hold, higher the total cost.
Collateral Type – Some brokers allow pledging stocks instead of cash. This may reduce or replace interest costs.
Market Conditions – Volatile markets may push you to hold positions longer, increasing total payable interest.

Why It’s Important to Calculate Interest Before Investing

Many traders focus only on potential profit and ignore costs. But in margin trading, even small daily interest charges add up.

For instance, a position held for 30 days at 15% p.a. could cost nearly ₹616.50 in interest for every ₹50,000 borrowed. If your trade profit margin is thin, these costs can erode most of your gains.

Tips to Manage and Reduce Interest in Margin Trading

Use MTF for short-to-medium-term trades (not long holding periods).
Pledge idle shares as collateral instead of only using cash.
Compare broker rates — choose one with transparent, low daily charges.
Exit unprofitable trades early — don’t let interest pile up.
Calculate expected interest cost upfront to see if the trade is worth it.

Final Thoughts

MTF can help increase your market exposure, but it also increases risk and interest cost. The good news is that the calculation is simple:

(Borrowed Amount × Interest Rate ÷ 365) × Holding Days

By estimating this cost before you invest, you can make smarter trading decisions and avoid surprises later.

If you’re looking for a broker with a low-cost Margin Trading Facility (MTF), Navia Pay Later offers a Margin Trading Facility* with up to 3× leverage (up to 66%) and competitive daily interest rates.

Disclaimer: Brokerage will not exceed SEBI prescribed limits. Statutory charges (STT, GST, stamp duty, exchange fees, SEBI turnover charges, etc.) apply.

Investments in securities market are subject to market risks, read all the related documents carefully before investing.

Margin Trading Facility (MTF) is offered as per SEBI and Exchange guidelines. Interest rates and leverage limits are subject to change as per regulatory provisions.