Or, let me put my question this way..!
Did you ever think what different types of brokerage charges you pay are?
This is one question I keep asking many traders but always in vain. It’s no surprise that I do not get an exact answer even from sub-brokers, agents or managers of various broking firms. So, I decided to unfold the information around this topic and let you know about the charges you pay which directly hit your profits.
In the first place, I see many traders do not take brokerage into consideration when they book profit. Not just that, this also happens when they predefine their strategy before getting into the trades. I came across many traders who often say that they have a profitable trading strategy and when I ask them to back test the results including brokerage charges, 80% of them did not have substantial profits (when efforts are considered). This is because many do not give importance to brokerage or may be afraid to accept that their strategy is a failure when brokerage is taken into consideration – possible, right?
And then, the most important one – many traders know their basic brokerage but they do not know other 5 charges exceed their brokerage sometimes. Especially, if you have brokerage of Rs.20/- and you are trading in futures, you end up paying around Rs.100/- which is 4 times your brokerage. So, it’s not just brokerage that you have to take into consideration but also other charges which actually make the difference, a big one.
Now, let’s deep dive to see what exactly they are. I will explain all 6 charges that we pay to the broker and government one by one.
Basic brokerage:
I know there is no need to throw much light on this as many of you are aware of what it is. But I will try to pin some “very” important points which are escaped from many similar articles.
- First thing that I like to mention is, STOP YOUR TRADING if your brokerage is more than Rs.20/- per lot or per order. Days are gone, when we paid brokerages in terms of percentages as 1 paisa to 5 paisa. If you are still in that era, come out of that immediately. You have to understand that 1 paisa brokerage will take around Rs.200/- per trade (buy and sell) whereas “Rs.20/- per lot” kind of trading would just take around Rs.100/- per trade. In both the cases, Rs.70-80 belong to government which is inevitable. And the difference of extra Rs.100/- you are paying to broker is purely because of your unenlightened thinking (if I can say..!).
- Secondly, you might be aware that there are many plans available in market – “Fixed monthly plan”, “Per order”, “per lot”, “percentage” etc. So, which plan do you choose?
The answer is, there is no “hard and fast” rule to select a brokerage plan. It depends on your trading volume, segment and other factors. I wrote another article exclusively for this in a more detailed manner – Which brokerage plan do I need to choose?
There I covered types of plans, pros and cons of each plan and then finally which plan suits your style of trading. I encourage you to read that to have a full understanding on the topic.
- Thirdly, note that you service tax (which I elaborated later in this article) is dependent on your basic brokerage. The more you pay as brokerage, the more your service charge will be. So, it’s always better to choose a low brokerage for trading.
- Finally, there are also other things that you need to keep in mind while selecting a broking firm like the service they deliver, margin they charge, leverage they allow etc. As these are irrelevant to this article, I covered them in another one – Factors to consider while choosing a broking firm.
STT (Securities Transaction Tax):
So, what is STT and how was that evolved?
To know what STT is, we need to peep a little into the year 2004. Till then, there is no way for the government to know whether traders/investors were paying taxes for the profits that are earned out of stock markets. To avoid tax evasion, the then government started STT which is nothing but charging advanced tax. On every trade you do, they charge a pretax (nothing but STT) and make sure that everybody is complying with tax rules.
Some points to note here are,
- STT is charged based on the turnover (No. of shares x Price of the stock)
- STT is not necessarily to be paid on both “buy” and “sell”. It depends on type of segment you trade (as shown below)
- STT charge is also not same and it differs for equity, futures and options.
Here are the rates for each.
Equity Delivery Transactions:
- Purchase – 0.125% of turnover (No. of shares x Price of stock)
- Sell – 0.125% of turnover (No. of shares x Price of stock)
Equity Intraday Transactions:
- Purchase – No charge
- Sell – 0.025% of turnover (No. of shares x Price of stock)
Future Transactions:
- Purchase – No charge.
- Sell – 0.01% of turnover (No. of shares x Price of stock)
Options Transactions:
- Purchase – No charge. However, 0.125% of settlement price in case of exercise.
- Sell – 0.5% of Premium
Ok, as I’m already prepaying tax, don’t I need to pay tax again if I earn by trading in stock markets?
Well, a little tricky one and I will try explaining it in a simple way. To answer this question, government wants to know if trading is your prime job or the secondary one.
Case 1 (Profits and Gains of Business or Profession): If trading in securities in your main business, then you need to pay normal year-end tax as everyone does. Based on your slab, you have to pay the tax and remember, as you have already paid advanced tax in the form of STT, you just have to pay the remaining. However, if you are in loss, you CANNOT get back your STT paid (which was there till 2008).
Case2 (Income from Capital Gains): If you are into another job or business and trading is your secondary business, then your profits fall under either of these two types again – Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG). If the profit you achieved is within a time period of 1 year, it is STCG and if it is more than 1 year, it is called as LTCG.
Now, if it is long term capital gain, then you need not pay a penny to the government. You already paid enough in the form of STT (both sides – buy and sell). But if is a short term capital gain profit, then you have to pay 15% tax again on your profits irrespective of the STT you already paid.
Note: After the financial year, you can ask your broker to give certificate for STT that you paid all along the year.
Hope you got a fair idea on STT now. Assuming that, we move to next item on our list, that is “Transaction Charges”
Transaction Charges:
This time, it’s “exchanges” turn to charge some bucks form us. Stock exchanges like NSE, BSE and others take this as “exchange and clearing” charges. But like a ray of light in dark, this type of charge is lesser compared to STT. If you interested to know more about clearing charges, let me know so that I can write a separate article on this topic. Below is the charge sheet for NSE and BSE.
Equity Delivery Transactions:
- Purchase: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
- Sell: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
Equity Intra-day Transactions
- Purchase: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
- Sell: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
Future Transactions
- Purchase: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
- Sell: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Option Transactions
- Purchase: 0.05% of Premium
- Sell: 0.05% of Premium
SEBI Turnover Charge:
Now it’s SEBI. I know that we are feeding many by trading but that is how it is L
Again, this is not as high as STT and also, there is NO SEBI turnover charge for equity trades.
Equity Delivery Transactions
- Purchase: No charge
- Sell: No charge
Equity Intra-day Transactions
- Purchase: No charge
- Sell: No charge
Future Transactions
- Purchase: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
- Sell: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
Option Transactions
- Purchase: 0.0002% of Premium
- Sell: 0.0002% of Notional Value in case of exercise or assignment
Stamp Duty:
Nothing much to say. As you know, stamp duty is the charge levied on the legal recognition of documents. Be it stock markets, real estate or any other transaction, unless you pay stamp duty, you cannot claim any stock as your own in case of any dispute. Not to forget that stamp duty varies from state to state as that is levied by state governments. Below is the general list of charges.
Equity Delivery Transactions
- Purchase: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
- Sell: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
Equity Intra-day Transactions
- Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
- Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Future Transactions
- Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
- Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
Option Transactions
- Purchase: 0.002% of Premium
- Sell: 0.002% of Notional Value in case of exercise or assignment
Service and other Taxes:
The last one, service and other taxes – I want to spend some time here as we have a chance to save some bucks if we take a wise decision.
There are many taxes like “service tax”, “surcharge”, ‘education cess”, “Swatch bharat”, “Krishi Kalyan” etc which your broker is supposed to collect from you and pay it to government. And altogether they make up to 15% and now this percentage is of your basic brokerage.
Point to note here is, if you have 1 paisa brokerage and Rs.100/- (say) is your basic brokerage, you end up paying Rs.15/- as other miscellaneous taxes. But if you have the basic brokerage as Rs.20/-, then you just have to pay 15% of Rs.20/- which is Rs.3/- and you are saving Rs.12/- straight away.
It might look Rs.12/- is a small difference and peanuts but when you accumulate your full year trades, the magnified figure will certainly be a reason for your satisfaction.
