Understanding The Brokerage

In the last unit, we discovered that stockbrokers take a certain percentage of the trade value as broking charges i.e brokerage for facilitating the transactions. We will discuss more on brokerages in this section and also understand the several other expenses that occur while trading in the stock market. 

The cost associated with the buying and selling of shares is called the brokerage. It can be a little confusing to understand the concept of brokerage. If you ask any relationship manager of the broker about the fee they charge, the usual reply would be “0.05% for the intraday trades and 0.50% for delivery” and if you negotiate further with them, the cost of brokerage can come down up to “0.01% for intraday and 0.40% for delivery”

Apart from this, there are various other costs that are charged and are not disclosed by the brokers. Hence, the effective cost of brokerage is different from the rates mentioned above. 

To have a clear understanding of this, you need to first understand the concept of intraday trading and delivery/positional trading.

 Intraday trading is also called day trading wherein if you enter & exit a position in a single day aka you square off the trade the very same day regardless of the profit/loss. Since, both the transactions are made on the same day, therefore, the cost of brokerage is low for intraday trading.

However, in case of delivery/positional trading, the position is not closed on the same day rather shares are held for those number of days until you reach your target price, it can be just a day time, or months’ time or years’ time until you make desired profit.

Generally, the trading cost in India includes the brokerage, securities transaction tax, stamp duty, service tax, and other charges. Here are the details of each cost separately:

• Brokerage: It is charged on the basis of the agreed percentage of the total cost of all the shares bought and sold.
• Securities transaction tax (STT):  It is charged by the Central Government. In case of delivery trading, STT is charged on both the buying and selling of shares but in case of intraday trading, STT is levied only on the sell side transaction. The STT is charged at 0.10% of the total transaction cost of buying or selling in case of delivery trading whereas 0.25% of the total transaction cost while selling the shares in intraday trading.
• Service tax: It is charged both for the intraday trading and delivery trading, it is chargeable only on the brokerage amount and does not include the stamp duty or STT. Currently, the service tax is charged at 15% of the brokerage amount.
• Stamp duty: It is charged by the State Government. Hence, each state has a different stamp duty rate, stamp duty is chargeable both on the buying and selling of shares and is charged on the total amount of transaction.
• Transaction charges: These charges are levied by the stock exchanges on intraday as well as delivery trading and on both buy-side and sell-side transactions. Presently, NSE charges a transaction fee equal to 0.00325% of the total amount whereas BSE charges a 0.003% of the total amount.
• SEBI turnover charges: The SEBI charges a turnover charge of 0.0002% of the total amount on intraday as well as delivery trading and on both buy-side and sell-side transactions.
• Depository Participant (DP) Charges.: Depository is a place where financial securities are held in dematerialised form. Depositories are primarily responsible for maintenance of ownership records & facilitation of trading in dematerialised securities.

National Securities Depository Limited (NSDL), and Central Depository Services Limited (CDSL) are the two prominent depositories in India are promoted by the National Stock Exchange (NSE) & the Bombay Stock Exchange (BSE) respectively.

A small fee is hence charged by the depositories in exchange for this service. A flat rate of depository shares of ₹10 to ₹35 is levied only for delivery trades. This charge is not applicable to intraday trading since the position is squared off on the same day.

Brokers also charge an “Annual Maintenance Charges” for your account every year. You also need to review these charges regularly and make sure that they are not charged multiple times in a year. Also, you can opt-in for paying AMC charges in monthly instalments

Understanding capital gain tax on share trading: 

It is yet another important aspect associated with share trading. There are basically two types of capital gains tax i.e. the short-term capital gain tax and long-term capital gain tax. 

In case of investments in shares, if you sell a stock after more than one year of buying it, it is considered as long-term investment and 10% long term capital gains tax is applicable on sale of securities over and above ₹1,00,000.

Likewise, if shares are bought and sold in the same financial year, it is considered as a short-term investment and the same is taxable at a flat rate of 15% irrespective of the tax slab rate. This is applicable only to the delivery trading, in case of intraday trading, investors need to pay taxes on the basis of normal slab rates applicable to him/her.