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KNOW YOUR COST

Most of the retail clients do not feel the necessity of understanding Cost of Transaction. The ignorance about the cost of transaction sometimes results in drastic erosion in the profits which is shown in the trading screen. Sometimes the profits even turn into losses, and the clients get shocked when they check their contract notes. As such, the dealing personnel also need to have a clear concept on this subject so that it can be informed and explained to their clients properly and transparently.

Let us see the Components of the Cost of transaction:

  • Brokerage
  • Service Tax
  • Securities Transaction Tax (STT) / Commodities Transaction tax (CTT)
  • SEBI Turnover Charge
  • Exchange Transaction Charge
  • Stamp duty

Please note that out of the above components, only the Brokerage is levied by the concerned Broker. Service tax, STT / CTT and Stamp Duty are levied by the Government and the Turnover Charges are levied by both SEBI and the Exchange. The rates of all the above taxes and duties differs segment wise and the rate of brokerage differs Broker wise.

Brokerage: Brokerage is the commission / service charge levied by the concerned Broker for the services rendered.

Securities Transaction Tax: STT or Securities Transaction Tax is a tax payable on the value of securities transacted through a recognized stock exchange. STT was originally introduced in 2004 by the then Finance Minister, P. Chidambaram.

Further, following the budget announcement in 2008, there was a change in the Income Tax regime relating to the treatment of STT, in cases where income from securities transactions is treated as business income. Earlier, credit for STT paid was being provided by way of a rebate against tax liability. Post Budget 2008, STT began to be treated like any other deductible expenditure against business income. The effect of this change can be explained with an example.

Assume that a company which has an income of Rs 100 has paid Rs 10 as STT. At 30 per cent corporate tax, in the earlier case, Rs 10 was deducted from tax liability of Rs 30 and the income tax outgo was Rs 20. Now, according to the revised criteria, STT of Rs 10 will be deducted from the income of Rs 100 and the net income of Rs 90 will be taxed at 30 per cent, resulting in an income tax outgo of Rs 27. The total tax burden in the current scenario is Rs 27 as compared to Rs 20 earlier. Thus, the transition of STT from being an offset against tax payable to a deductible expenditure has raised the overall tax burden and hence the cost of trading, significantly.

The government reduced this tax in the 2013 budget after a lot of protests for years by the brokers and the trading community. Currently, the tax rates are as follows:

Sr. No.Taxable securities transactionTax Rate w.e.f. June 1, 2013Payable by
1.Purchase of an equity share in a company, where such contract is settled by the actual delivery or transfer of such share or unit.0.100 per centPurchaser – on the value of taxable securities transaction based on the volume weighted average price.
Purchase of a unit of an equity oriented fund, where such contract is settled by the actual delivery or transfer of such share or unit.NILNA
2.Sale of a equity share in a company, where such contract is settled by the actual delivery or transfer of such share or unit0.100 per centSeller – on the value of taxable securities transaction based on the volume weighted average price.
Sale of a unit of an equity oriented fund, where such contract is settled by the actual delivery or transfer of such share or unit0.001 per centSeller – on the value of taxable securities transaction based on the volume weighted average price.
3Sale of an equity share in a company or a unit of an equity oriented fund, where such contract is settled otherwise than by the actual delivery or transfer of such share or unit.0.025 per centSeller – on the value of taxable securities transaction based on the volume weighted average price.
4aSale of an option in securities0.017 per centSeller – on the option premium.
4bSale of an option in securities, where option is exercised0.125 per centPurchaser – on the settlement price.
4cSale of a futures in securities0.010 per centSeller – on the price at which such futures is traded.
  • Value of taxable securities transaction relating to an “option in securities” shall be the option premium, in case of sale of an option in securities.
  • Value of taxable securities transaction relating to an “option in securities” shall be the settlement price, in case of sale of an option in securities, where option is exercised.

The following procedure is adopted by the Exchange in respect of the calculation and collection of STT:

  • STT is applicable on all sell transactions for both futures and option contracts.
  • For the purpose of STT, each futures trade is valued at the actual traded price and option trade is valued at premium. On this value, the STT rate as prescribed is applied to determine the STT liability. In case of final exercise of an option contract STT is levied on settlement price on the day of exercise if the option contract is in the money.

In this connection, let us discuss a very pertinent aspect related to STT Treatment in Option Trading. It is very important to note that ITM (In the money) Options should be squared off rather than let them expire on the expiry day. Let us take an example.

A Client, X has bought 1 Lot Nifty Call of the strike 8400 for a premium of Rs. 20. On the expiry day, two things may happen –

  • Nifty may expire at or below 8400. In that case the Call gets worthless and expires at Rs. Zero, so no STT is levied as STT for Option worth Zero is Nil.
  • Nifty may expire above 8400, say for example at 8450 i.e., in the money. The value of the Call becomes Rs. 50. If X sells the Call Option before expiry, he would get the credit of Rs. 1250 (Nifty Lot size 25 x Rs. 50) and the STT will be applicable as Re 0.21 only, a negligible amount. Profit of X = Rs. 1249.80 – Rs. 500(cost) = Rs. 749.80.
  • But, if X lets the Call option to expire without squaring off, the STT will be applicable @ 0.125% and that too on the settlement price i.e., 8450. So the STT amount would be (0.125% x 8450 x 50) i.e., Rs. 264. Surely, Rs. 264 is a huge amount in comparison to Re. 0.21. Profit of X reduces considerably to Rs. 485.80.
  • In the worst case, suppose Nifty expires at 8420 and X lets the call option to expire. It is also in the money but in this case the Client gets credit of Rs. 500 only, which is equal to the purchase amount and X stands at no loss no profit but the STT would be levied at Rs. 262.80. So X incurs a net loss of Rs. 262.80.

Note: Brokerage and other taxes are not considered in the above example.

If X was short / written options (sold first), he already paid STT and it doesn’t matter if he buys the options on the exchange or hold them till expiry to square off since there is no STT on the buying side.

There is another aspect which is very important. If X Buys 8400 Call or 8500 Put and the Nifty trades around 8450 on the expiry day, then the Call or Put should be priced at least Rs. 50 (the intrinsic value concept) but practically we see that the Option is being traded at Rs. 44 – 45 approx. This happens due to the STT factor. Everyone trading is factoring in the fact that STT will be much higher if the option is held till the end of that day and hence will not magically correct before the end of the day. Hence, do not perform trades/strategies assuming that discounted price of option will correct before the end of the expiry day.

Commodity Transaction Tax:

Like STT, Commodity Transaction Tax (CTT) is applicable for those dealing in trading of commodities. It is introduced to tax the commodity trading where both the buyer and the seller of a contract will be taxed depending on the amount of contract size @ 0.01% i.e., Rs. 10/- per lac.

As many as 30 pure agro commodities, including wheat, barley and chana, are kept out of the ambit of CTT.

SEBI Turnover charge:  SEBI in the year 2006 vide notification decided to collect Turnover Charges on the Securities Transaction, as follows:

Sr. No.Nature of securitiesRate of Fee
1.All sale and purchase transactions in all securities other than debt securities0.0002 per cent of the price at which the securities are purchased or sold (Rs.20 per crore)
2All sale and purchase transactions in debt securities0.000005 per cent of the price at which the securities are purchased or sold (Rs.5 per crore)

Exchange Transaction Charge: NSE and BSE levy transaction charges on the turnover:

Sr. No.Nature of securitiesRate of Fee
1.Cash DeliveryRs. 3.25 per lac (Payable by Buyer & Seller)
2Cash intra DayRs. 3.25 per lac (Payable by Buyer & Seller)
3.FuturesRs. 1.90 per lac ((Payable by Buyer & Seller)
4.Options0.05% on the Premium (Each side)

Stamp Duty: Stamp Duty is levied by the State Government where the address of the Client is situated as per the record. However, this is a foggy area as many State Governments including West Bengal has not yet notified the process of collection of the stamp duty and also has not yet rationalized the rate of stamp duty. It is expected that after implementation of GST, the rate of stamp duty shall be uniform throughout the country. However, presently the Stamp Duty rate in West Bengal is as follows:

Type of TradeStamp Duty Rate
Non-delivery trade0.002%
Delivery trade0.10%
F&O0.002% (In case of Option only on Premium)

Service Tax: Service Tax is an indirect tax imposed by Government of India on services provided to the consumer. The service provider (in this case the Broker and the Exchange) collects the tax from end-user (in this case the Clients) and pays the same to the government.

Service Tax is levied @ 12.36% on Brokerage and transaction Charges.

So, Let us have a look at the Total Transaction Cost in Equity Cash Intraday, Equity Cash Delivery and Equity Derivatives. For the purpose of the example given below, the Brokerage Rate has been assumed as 0.30% for Delivery and 0.03% for Intraday / Futures.

(Cash Intra Day)
Trade ValueBrokerageSTTTransaction ChargeSEBI TOCStamp DutyService taxTotal
(Both side)
1000003012.503.250.224.1152.06
(Cash Delivery)
Trade ValueBrokerageSTTTransaction ChargeSEBI TOCStamp DutyService taxTotal
One side
1000003001003.250.210037.48540.93
(Futures)
Trade ValueBrokerageSTTTransaction ChargeSEBI TOCStamp DutyService taxTotal
One side
10000030101.90.223.9448.04
All Charges applicable on Premium only in case of Options.

Summary of Transaction Cost in Other Segments

CommodityBrokerage, CTT, Service Tax
CurrencyBrokerage, SEBI TOC, Service Tax
OFSAll Charges similar to equity cash delivery
MFSSNil
SLBMBrokerage, Service Tax

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