Stock market foundationsModule 4, lesson 20 of 29
Trading costs and taxes on shares
The charges you pay each time you buy or sell shares, who sets each one, why frequent trading is expensive, and how gains and dividends are taxed.
In this lesson
- List the charges on a share trade and say who sets each one.
- Estimate the total cost of buying and later selling a holding.
- Explain why costs grow so quickly with frequent trading.
- Explain how short-term and long-term gains differ for tax, and why the holding period matters.
Builds on
- Bid, ask, spread and liquidityThe spread is a hidden cost of every trade, on top of the charges in this lesson.
- Dividends, capital gains and lossesTaxes apply to capital gains and dividends, which that lesson defines.
On this page
In simple terms
Buying and selling shares is not free. Each trade carries a handful of small charges: your broker's fee, a tax on the trade itself, fees to the exchange and the regulator, stamp duty and GST. When you sell at a profit, there may also be tax on the gain.
Each charge is a fraction of a percent, which is why they are easy to ignore. But they are paid on every trade, so how often you trade matters as much as what each charge is.
The charges on a trade
| Charge | Who sets it | What it is |
|---|---|---|
| Brokerage | Your broker | The broker's fee for carrying out your order. Some brokers charge nothing on some kinds of trade and a flat fee on others; others charge a percentage |
| Securities transaction tax (STT) | The government | A tax on the value of each trade, at rates that depend on the kind of transaction, for example whether it is settled by delivery or squared off within the day |
| Exchange transaction charges | The stock exchange | A small percentage of the value traded |
| SEBI turnover fee | SEBI | A very small fee on the value traded |
| Stamp duty | The government | A duty on the transfer of shares, collected through the exchange's clearing corporation |
| GST | The government | Tax on the services of the broker and the exchange |
| DP charge | Your depository participant, usually your broker | A fee for moving shares out of your demat account when you sell |
The actual rates are published by the exchanges, your broker and the government, and they change, often in the annual Budget. You do not need to remember them: they all appear on the contract note your broker sends after every day you trade, which is the most reliable record of what you actually paid.
Worked example: buying and later selling
Worked example: 100 shares bought at ₹500 and sold at ₹550
To keep the arithmetic simple, suppose all the charges together come to 0.15% of the value of each trade. This is a made-up figure for the example; your contract note shows the real amounts.
| Buy value: 100 × ₹500 | ₹50,000 |
|---|---|
| Charges on buying: 0.15% of 50,000 | ₹75.00 |
| Sell value: 100 × ₹550 | ₹55,000 |
| Charges on selling: 0.15% of 55,000 | ₹82.50 |
| Total charges | ₹157.50 |
| Gain after charges: 5,000 − 157.50 | ₹4,842.50 |
For one buy and one sale, charges took about 3% of the profit, which is modest.
Why frequent trading is expensive
The same small charges look very different when they are paid many times a year.
Worked example: ₹50,000 traded within the day, 20 times a month
Suppose each round trip, buying and selling ₹50,000 within the day, costs ₹65 in charges. Again, this is a made-up figure for the example.
| Cost of one round trip | ₹65 |
|---|---|
| Twenty round trips a month | ₹1,300 |
| Twelve months | ₹15,600 |
That is about 31% of the ₹50,000 being traded, paid in charges in one year, before the spread and before any losing trades. To break even, the trader's winning trades have to earn all of that back first.
Charges are not the only cost. Every time you buy at the ask and sell at the bid you also pay the spread, and fast-moving prices add slippage. These do not appear on the contract note, but they are real. The investing compared with trading lesson describes what SEBI's studies found about how individual traders fare after these costs.
How gains on shares are taxed
When you sell shares for more than you paid, the profit is a capital gain. Tax law in India sorts capital gains on shares into two kinds, depending on how long you held the shares:
- Short-term gains, on shares held for a shorter period, and
- Long-term gains, on shares held for longer than a period the law sets.
Long-term gains on listed shares have usually been taxed at a lower rate than short-term gains, and the law has often allowed a yearly amount of long-term gains to be free of tax. The holding period, the rates and the tax-free amount are all set by the Income-tax Act and are changed from time to time, so check the current rules with the Income Tax Department before you sell.
A few ideas stay the same however the rates change:
- The costs of buying and selling, such as brokerage, are generally taken into account when working out the gain.
- Selling just before a holding becomes long-term can mean paying a higher rate than waiting a little longer would.
- Profits from trading within the day, and from futures and options, are treated differently from investment gains.
- Dividends are income, and they are taxed as part of your income; companies may deduct some tax before paying them.
Worked example: Tax on two sales in the same year, with made-up rates
Suppose, for this example only, that long-term gains above ₹1,00,000 a year are taxed at 10% and short-term gains at 20%. In one year you make a long-term gain of ₹2,00,000 and a short-term gain of ₹40,000.
| Long-term gain above the tax-free amount: 2,00,000 − 1,00,000 | ₹1,00,000 |
|---|---|
| Tax on it at 10% | ₹10,000 |
| Short-term gain taxed at 20%: 40,000 × 0.20 | ₹8,000 |
| Total | ₹18,000 |
The method is what matters: separate the two kinds of gain, apply any tax-free amount to long-term gains, and apply each rate to its own kind of gain. Use the current rates when you do this for real.
Why it matters
Costs and taxes are the part of investing you can control. You cannot choose what the market does next year, but you can choose how often you trade, which broker you use and how long you hold. Over many years, keeping costs low and holding long enough to qualify for long-term treatment can make a large difference to what you keep.
Limitations
- The charges and tax rules described here are the kinds that exist; their levels change, so the examples use made-up numbers.
- Brokerage, exchange charges and DP charges differ by broker and exchange.
- The tax section covers the broad idea for listed shares held by an individual. Mutual funds, derivatives, intraday trading, non-residents and unlisted shares follow other rules.
Common mistakes
- Believing "zero brokerage" means a free trade. Taxes, exchange and regulatory fees, stamp duty and GST still apply.
- Ignoring how often you trade. The cost of one trade is small; the cost of a year of trading is not.
- Selling just before a holding turns long-term without checking whether waiting would lower the tax.
- Relying on an old article for tax rates. Check the current rules each time.
Try it yourself
- Open a contract note from any trade you have made, or ask your broker for a sample. Find each charge listed in this lesson.
- Add up the charges and work them out as a percentage of the trade value.
- Estimate how much you would pay in a year if you made that trade once a week, and compare it with the size of the trade.
- Look up the current holding period and rates for gains on listed shares on the Income Tax Department's website, and redo the tax example with them.
Key takeaways
- Every trade carries several charges, including brokerage, securities transaction tax (STT), exchange and SEBI fees, stamp duty, GST and, when you sell, a depository charge.
- Each charge is small, but they are paid on every trade, so frequent trading can eat a large share of your capital in a year.
- Your contract note lists every charge on every trade; it is the reliable record of what you paid.
- Tax law treats gains on shares held for a short time differently from gains on shares held for longer, so how long you hold can change how much tax you pay.
- Rates, limits and holding periods are set by law and change over time. Look them up with the Income Tax Department before acting, rather than relying on a figure you read once.
Check your understanding
Finished reading?
Your progress is saved only in this browser.
Terms used in this lesson
- Securities transaction tax
- A tax charged on the value of buying and selling shares and other securities on a stock exchange in India, collected through your broker.
- Brokerage
- The fee your stockbroker charges for carrying out a trade, either a flat amount per order or a percentage of the trade value.
- Contract note
- The document your broker sends after a day of trading, listing each trade's price and quantity and every charge and tax on it.
- Capital gain
- The profit from selling an investment for more than you paid for it; a capital loss is the opposite.
- Stamp duty
- A government duty on transferring securities, charged on share trades and collected through the exchange's clearing corporation.
References
- SEBI turnover fees, STT and other levies, National Stock Exchange of India. The exchange's page listing the government and regulatory charges on trades.
- Special provision for sale of shares (period of holding, costs and tax rates), Income Tax Department, Government of India. The Income Tax Department's guidance on the tax treatment of gains from selling shares.
Spotted a mistake or something unclear? Report it by email. Here is how corrections work.
This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.