China -- an all-weather ally of Pakistan which has blocked three similar moves -- said it needed more time to examine the sanctions request targeting Azhar, and asked for a technical hold which could last up to nine months.
In a statement, the Indian foreign ministry said it "was disappointed by the outcome", adding it would continue to pursue all avenues to make sure "terrorist leaders who are involved in heinous attacks on our citizens are brought to justice".
China has blocked three previous attempts at the committee on sanctions against Al-Qaeda and IS-linked groups to blacklist the JeM leader. The group itself was added to the UN terror list in 2001.
China's decision was the top news across Indian media on Thursday, with the Indian Express headlining its report: "Jaish chief gets Great Wall of China".
India's main opposition leader Rahul Gandhi used the opportunity to mock Prime Minister Narendra Modi, who is seeking re-election in a national ballot starting next month.
"Weak Modi is scared of Xi. Not a word comes out of his mouth when China acts against India," Gandhi tweeted, referring to Chinese President Xi Jinping.
Regional rivals China and India have longstanding territorial disputes but Modi and Xi have tried to patch up ties, banking on their personal chemistry to smoothen differences.
China's move on Azhar also triggered a storm of anti-Chinese sentiment on Twitter with #BoycottChinaProduct attracting hundreds of tweets.
China is India's biggest trading partner, but the trade imbalance is skewed heavily in favour of Beijing.