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Module 6: Taxes and costs

You buy a share at ₹500, sell at ₹520 and feel good about ₹20. But brokerage, government charges and income tax take their share. What stays in your pocket is the real return. This module shows what each charge is and how to estimate your net gain before you sell.

How it connects. Module 4 · Mutual funds, SIPs, ETFs showed that a small yearly fund cost compounds into a big difference. Trading costs and tax work the same way. Rates below were checked in Oct 2026. Rules change, so confirm on the Income Tax website before you act. This is education, not tax advice.

1. Why costs and tax matter

The everyday idea. Think of a leaky bucket. Each small hole looks harmless, but together they empty a lot of water. Costs and tax are the holes in your profit.

You earn on the gross profit, but you can only spend the net profit. Always judge a trade by what you keep.

Common trap. Celebrating a “profit” before counting costs and tax, mostly on small or frequent trades.

2. Costs on every trade

The everyday idea. Entering a market costs a gate fee, and some stalls also charge a handling fee. Trading has several small fees. Each is tiny; together they add up.

• Brokerage: the broker’s fee. Many brokers charge nothing on delivery trades (shares you keep) but charge a small fee on intraday trades.
• STT (Securities Transaction Tax): a government tax on trades. On delivery it is 0.1% on the buy value and 0.1% on the sell value. For intraday it is 0.025%, on the sell side only.
• Exchange charges: a tiny fee to NSE or BSE.
• GST: 18%, charged on brokerage and exchange charges (not on STT).
• Stamp duty: 0.015% on the buy value of delivery trades.
• Demat charge: many brokers charge a small fixed fee for each company sold in a day. It varies by broker.

Worked example. Buy 100 shares at ₹500 (₹50,000), sell at ₹520 (₹52,000). Profit on paper is ₹2,000. Costs add up to about ₹130. That is roughly 0.26% of the amount you put in, even with zero brokerage.

Common trap. “Zero brokerage” does not mean zero cost. STT and the other charges still apply.

3. Tax on profits: STCG and LTCG

The everyday idea. The government rewards patience. If you sell quickly the tax is higher. If you hold for longer, it is lower.

• STCG (short-term capital gain): profit on listed shares or equity mutual funds sold within 12 months. Taxed at 20%.
• LTCG (long-term capital gain): profit when held for more than 12 months. The first ₹1.25 lakh of such gains in a financial year is tax-free. Above that, tax is 12.5%.
• Cess: 4% extra on the tax amount.

Worked example 1. Short-term profit ₹50,000. Tax = 20% of 50,000 = ₹10,000. Add 4% cess (₹400). Total ₹10,400.

Worked example 2. Long-term profit ₹2,00,000. Free limit ₹1,25,000. Taxable = ₹75,000. Tax = 12.5% of 75,000 = ₹9,375. Add 4% cess (₹375). Total ₹9,750.

Losses. A short-term loss can be set off against both short-term and long-term gains. A long-term loss can be set off only against long-term gains. Unused losses can be carried forward for 8 years if you file your return on time.

Common trap. Selling a few days before the 12-month mark and paying 20% when waiting would have cost far less. Always check the date you bought.

4. Which rule applies?

The everyday idea. The same rupee of profit can be taxed under different rules, depending on how it came about.

• Intraday and F&O profits are usually treated as business income and taxed at your slab rate, not as STCG.
• Dividends are added to your income and taxed at your slab rate.
• Debt funds, gold and property follow different holding periods and rates. Check before you sell.

Common trap. Assuming all trading profit is taxed like delivery profit. Tax rules depend on the type of trade. For anything unclear, ask a chartered accountant.

5. How costs eat returns

The everyday idea. One small leak is nothing. Fifty leaks a year is a flood.

Worked example. If one round trip costs about 0.26% (as in topic 2), then 5 round trips cost about 1.3% of your money a year, and 50 round trips cost about 13%. At 50 trades you would need to earn more than 13% a year just to break even, before tax.

Common trap. Trading very often to “catch every move”. Count the cost of each trade before you place it. A buy-and-hold approach pays these charges rarely.

6. Putting it together: before you sell

1. Time. How long have you held it?
2. Costs. Estimate STT and the other fees.
3. Tax. Is it STCG at 20% or LTCG at 12.5%?
4. Free limit. Have you already used the ₹1.25 lakh LTCG limit this year?
5. Net. After all of it, is the trade still worth it?

Worked example. You bought a share 10 months ago. Gain: ₹50,000. Selling now: tax ₹10,400. Waiting 2 more months: the gain becomes long-term. ₹50,000 is below the ₹1.25 lakh free limit, so tax is ₹0. The wait saves ₹10,400, if you are comfortable with the price risk meanwhile. That risk is the other side of the question. Taxes should inform a decision, not make it.

Takeaway: estimate what you keep, not what you see.

Disclaimer: WealthyTrees is for education only. Nothing here is investment advice or a recommendation to buy, sell or hold any share or product. Numbers and examples are made up. WealthyTrees is not a SEBI-registered investment advisor. Please speak to a SEBI-registered advisor before you invest.