Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Part 15. Costs, Taxes and the Arithmetic of Frequency

Costs are the part of trading nobody puts on a screenshot. They are also the reason a strategy that looks profitable on paper is a slow loss in a real account. This part is short, unglamorous, and probably worth more rupees to you than any indicator in this guide.

15.1 What You Actually Pay

Every trade carries several charges. Individually they look trivial. Compounded across a year of activity they are not.

Charge

Applies to

Note

Brokerage

Every order

Flat fee per order or a percentage. Both legs, so double it.

Securities Transaction Tax

Sell side mainly

Different rates for delivery, intraday, futures and options

Exchange transaction charge

Every trade

Small percentage of turnover

GST

On brokerage and exchange charges

Charged on the fees, not on the trade value

SEBI turnover fee

Every trade

Very small

Stamp duty

Buy side

Varies by instrument

The bid ask spread

Every trade

Not on any statement, and often the largest of the lot

Careful here

The spread is the invisible cost. In a far out of the money option quoted 4.20 bid and 5.40 ask, you buy at 5.40 and can immediately sell only at 4.20. You are down 22 percent before the market has moved at all.

This is why illiquid strikes are expensive even when the premium is small, and why "cheap" options are frequently the most costly thing on the screen.

15.2 The Expiry Day Tax Trap, Stated Plainly

Part 10 flagged this. It is worth its own section because it costs real money to people who never see it coming.

Securities Transaction Tax on options is charged at one rate when you sell the option in the market, calculated on the premium. When an in the money option is exercised at expiry instead, STT is charged at a much higher rate and, critically, on the settlement value rather than on the premium.

The same position, two ways of closing it

You hold a Nifty call that finishes 8 points in the money on expiry day. Lot size 75.

If you sell it in the market at 8 rupees before the close:

You receive 8 x 75 = 600, and pay STT on the 600. A few rupees.

If you let it be exercised:

You receive the same 600 of intrinsic value.

STT is charged on the settlement value, which is based on the full 24,000 level, not on the 8 rupees.

The tax can exceed the 600 you received.

You did nothing wrong except fail to press a button. The fix costs one click.

The rule to remember

Close in the money option positions in the market before expiry. Do not let them be exercised unless you specifically want the settlement. This applies with even more force to stock options, where exercise brings a physical delivery obligation worth lakhs.

15.3 How Trading Income Is Taxed in India

This is a summary for orientation, not tax advice, and the rules and rates change. Confirm the current position with a chartered accountant before you file.

Activity

Treated as

Practical consequence

Shares held over a year

Long term capital gains

A concessional rate with an exemption threshold

Shares held under a year

Short term capital gains

A higher fixed rate

Intraday equity

Speculative business income

Taxed at your slab rate

Futures and options

Non speculative business income

Taxed at your slab rate; expenses can be claimed

Two consequences follow that surprise people. First, F&O profits are business income, so they are taxed at your personal slab rate, which for a salaried person in a higher bracket can be considerably more than the capital gains rate they were imagining. Second, because it is business income, genuine expenses such as brokerage, data subscriptions and internet costs can be set against it, and losses can be carried forward, but only if you file the correct return on time.

The audit threshold

F&O turnover is calculated in a particular way that is not the same as the contract value, and crossing certain thresholds triggers a tax audit requirement. A person who traded a modest amount of capital but did so frequently can find their computed turnover is very large.

If you trade derivatives at all, keep a proper record from day one and speak to an accountant before the year ends rather than after. This is the single most common administrative mess in Indian retail trading.

15.4 The Arithmetic of Frequency

Here is the calculation almost nobody does, and it explains the SEBI loss statistics better than any story about discipline.

What activity costs over a year

Suppose your all in cost per round trip, including brokerage, taxes, fees and a realistic spread, is 0.15 percent of the position value. That is a reasonable figure for a liquid option position and optimistic for an illiquid one.

Trade once a week: 52 round trips x 0.15% = 7.8 percent a year of costs

Trade once a day: 250 round trips x 0.15% = 37.5 percent a year of costs

Trade three times a day: 750 round trips x 0.15% = 112 percent a year of costs

The third trader must earn more than doubling their capital, before making a single rupee for themselves.

This is not a claim that active trading cannot work. It is a statement about the hurdle. An investor holding for two years pays that cost twice. A daily trader pays it five hundred times. Both need skill; only one of them needs to be extraordinary.

The rule to remember

Frequency is a cost, and it is the one cost entirely within your control. Halving the number of trades you make is mathematically identical to finding a strategy that earns several percent more a year, and it is a great deal easier to achieve.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.