Stocks are a prevalent form of investment. Whether the goal is to earn returns in the long run or make profits through short term investing, there are various cost and tax considerations.
Investors incur different costs like brokerage charges, depository participant (DP) fees, and transaction fees. Moreover, there are various taxation considerations like capital gains tax, Securities Transaction Tax, stamp duty and Goods and Services Tax. In this article, we cover the costs involved in investing through stocks and the process of calculating net returns.
Cost of investing in stocks
The various costs involved in equity investing in India:
What are Stock Brokerage Charges?
For every transaction, brokers undertake the essential function of connecting the two sides involved. It requires considerable investment in building a reach through marketing and developing services. A market is formed because of the brokers and dealers supporting it. But, of course, they won’t do it out of goodwill. They charge a brokerage fee for carrying out these functions.
When investors buy or sell a stock, they incur a brokerage fee. Depending on your broker, the fees incurred vary. Full-service brokerage is generally higher than discount brokerage. Full-service brokers provide additional services like research and advice, retirement planning, tax tips, and more to connect buyers and sellers.
Brokerage calculation formula
Suppose the brokerage is represented in percentages as 0.04% for intraday and 0.4% for delivery.
Intraday brokerage = Number of shares X Market Price of shares X 0.04%
Delivery brokerage = Number of shares X Market Price of shares X 0.4%
What is Securities Transaction Tax?
In India, Securities Transaction Tax (STT) is payable on the value of securities transacted through a stock exchange. It is a tax paid on the total amount paid or received in a share transaction. STT is similar to tax collection at source (TCS) and attempts to be a clean and efficient way of collecting taxes from financial market transactions.
STT is 0.1% of the delivery-based equity share trades’ transaction value.
What are stamp duty charges in the stock market?
In India, stamp duty is a tax charged on trading stocks, derivatives and commodities. It is levied while issuing, selling or transferring the stocks, debentures, currency derivatives, and commodity instruments. Stamp duty is collected to provide a stamped contract note to the traders at the end of the day.
Stamp duty is applicable only on the buy-side.
The following table shows the stamp duty charges applicable on equity stocks:
|Trading segment||Stamp Duty Rate|
|Equity Delivery||0.015% (₹ 15 per lakh)|
|Equity Intraday||0.003% (₹ 3 per lakh)|
|Futures (equity and commodity)||0.002% (₹ 2 per lakh)|
|Options (equity and commodity)||0.003% (₹ 3 per lakh)|
How GST is calculated on stock market transactions?
All businesses are required to pay the Goods and Services Tax (GST), even the companies which are creating the market. GST (Central and State GST) is charged on brokerage transaction charges.
CGST = 9%
SGST = 9%
As a result, a total of 18% is charged on the brokerage fees charged on the transaction. These taxes end up falling on the shoulders of the traders. Both sides, buyers and sellers, are required to foot this bill.
What are transaction charges in stocks?
Stock exchanges charge transaction fees on both sides of trading. On NSE, the transaction fees amount to 0.00325% of the total traded value.
On BSE, the transaction fees amount to 0.00275% of the total traded value. On BSE, transaction charges may vary as per Scrip Group. Learn more about scrip groups here.
Transaction charges are the same for intraday and delivery daily transactions.
What are depository participant (DP) transaction charges?
In India, there are 2 depositories, the Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL), responsible for facilitating holding securities in electronic form and enabling transactions.
Depository participant charges are charged by depositories (CDSL & NSDL) and the depository participant (usually the broker).
DP Charges = ₹13.5*(1 + 18% GST) per day per scrip (stock)
What is the tax on stock market gains?
Investors can earn income by selling shares after appreciation. This income is taxable under Capital Gains Tax. Capital Gains classifies this type of income into 2 sections:
- Long-term capital gains (LTCG)
- Short-term capital gains (STCG)
The holding period forms the criteria of classification. If the stocks are held for less than 12 months, the gains are termed short-term capital gains. If the stocks are sold after 12 months of holding, the gains are termed long-term capital gains.
Short-term capital gains = Sale price – Purchase price – Transfer Expenses
Short-term capital gains tax rate = 15% (plus surcharge and cess as applicable)
LTCG = Sales Value – Cost of Acquisition (as per grandfather rule) – Transfer Expenses
The cost of acquisition is the higher one of the following values:
- Market Value as of 31st January of the year for which LTCG is calculated
- Actual purchase price
Tax Liability = 10% (plus cess as applicable) if LTCG is more than ₹1 Lakh.
How to Calculate Net Returns?
We can calculate net returns now that we have covered the costs and taxes involved in investing through stocks. Net returns refer to the investment’s return after subtracting the costs and taxes.
Calculating net returns is a pretty straightforward process and does not require any complicated maths. Anyone can calculate the net returns using Excel sheets or even a simple calculator following the procedure mentioned below.
You need to collect the following figures for calculating net returns:
- Fees paid
- Taxes Levied
- Purchasing cost of stocks
- Selling price of stocks
STEP 1: Calculate total costs
Total Costs = Purchasing cost of the stocks + Fees incurred + Taxes levied
STEP 2: Calculate total returns
Total Returns = Selling price of the stocks + Dividends Earned – Total Costs
STEP 3: Calculate net returns
Net Returns = (Total Returns / Total Costs) – 1
STEP 4: Show the net returns in percentage terms
Net Returns (in %) = Net Returns x 100
Investors use net returns to assess the returns made on their investments. In addition, the figure you would derive from the above steps helps learn about other valuable stats like the stock’s Alpha (returns above benchmark returns).
There are different cost and tax considerations involved with investing in stocks. Depending on the holding period and type of broker, costs and taxes vary greatly. Feel free to use this blog as a guide to calculating the expenses you may encounter while investing in stocks.
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The formula for net returns is pretty straightforward.
Net Returns = Returns or profits / total cost of investing
You would need to find out the costs you incurred while investing and the returns you received. The returns would include any gains through capital gains, dividends, or other returns. The costs would consist of the fees, expenses and taxes you faced.
Net present value is the difference between the present values of the total cash outflows and inflows. The purpose of finding the NPV is to learn the true value of an asset after adjusting for a particular rate of interest. By setting the interest rate to the inflation rate, we can know the inflation-adjusted value of an investment. The interest rate is sometimes also set to the cost of borrowing funds.
You should know 4 things before you start calculating the monthly return on stocks:
Amount invested at the start of the month
Value of investment at the end of the month
Any investments made during the month
Any withdrawals made during the month
Now you can input these values into the following formula to get the monthly returns
This formula would give the monthly returns on your investments in percentage. It should be noted that monthly returns are lower than yearly returns as the period is much shorter.