Gross vs. Net Returns

The Government always has first dibs

First time investors often get bedazzled by tall claims of “20%” returns in direct equities. All they need to do is subscribe to an “exclusive” telegram channel or advisory service and mint their way to millions. Even if these claims were true, gross returns – the number often marketed – has little to do with the net returns that the investor finally realizes at the end of the year.

Very few know that a high-churn portfolio that delivers 20% gross returns is equivalent to a mutual fund that delivers 14% net. So, who ate your cheese?

Layers of Transaction Taxes

Securities Transaction Tax (STT)

The STT is an automatic tax collected by the government on all transactions irrespective of whether you made money on it or not. On equities, it is currently set at 0.1% – if you bought & sold 1 stock worth Rs. 100, then the government collects 20p on it. This is one of the biggest drags on high-churn strategies.

Last year, the government collected ₹16,927 crore in STT.1

Exchange Transaction Charges

The trading venue, typically the NSE (National Stock Exchange) or the BSE (Bombay Stock Exchange,) levies a transaction charge for allowing you to trade through them. This varies by exchange and they are know to give rebates to high volume brokers to keep them loyal. The last time I checked, it was around 0.00345% on the NSE.2

Stamp Duty

When the Central Government is skimming off through STT, why should State Governments be far behind? The states too have their hands in the till through “stamp duty.”

Stamp duty is a state levy paid to register a document, typically an agreement or transaction paper between two or more parties, with the registrar. In an era where all transactions are electronic and registering transactions is just flipping some bits in a database, this is basically free money to the states.

Before 2020, every state had its own rate but thankfully, the Modi Government rationalized it to a common rate of 0.015% on the buy-side of equities.3

SEBI Turnover fees

If you though that SEBI was an arm of the government and should be entirely funded by the general budget, the joke is on you. If you have a look at your contract note that the brokers sends you on the days that you trade, you’ll find a “SEBI Turnover Fee.” This is 0.00015% on both buys & sells. While its one of the smaller taxes/fees on transactions, it is still a percentage of total volume, so it adds up over time.4

During 2019-20, the total amount of fees and other charges collected by SEBI was Rs. 608.26 crore.5

Short-term and Long-term Capital Gains Tax

The rationale behind STT, introduced in 2014, was to replace the long-term capital gains tax. It was said that there was a lot of “leakage” in collecting LTCG and that a tax on transactions collected directly by the exchanges would plug it. However, the 2018 budget saw the re-imposition of LTCG.6

However, if your strategy demands churn, then you need to be worried more about STCG (15% on profits) than on LTCG (10% on profits.)

A High Bar of Direct-Equity

After all these taxes, levies and charges, when the numbers are tallied up at the end of the year, most direct-equity investors would be better off with a mutual fund.

The napkin math (sheet) above doesn’t consider brokerage – since those are mostly zero – and DMAT charges – those charged by CDSL – since those are flat fees charged only on sales.

Direct-equity investing strategies need to walk a fine line between optimizing for lower transaction costs, risk management and taxes. This is where we find advisory disclosures lacking. Most advisors do not disclose portfolio churn rates and nor do they indicate what the net, after-tax, returns would look like.

Also, a mutual fund’s NAV includes all of these charges and your portfolio compounds tax-free until you redeem. So, if you have a 5+ year time horizon, then compounding the 15% STCG adds significant tailwinds to your portfolio.


While comparing different strategies, investors should also consider portfolio churn and try and back into what the net, after-tax, returns would look like at the end of the year. Know that mutual fund NAVs are net of transaction costs and can compound tax-free.

Direct-equity strategies should clear a high-bar.

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