5 Reasons why you need to pay charges despite opting for zero brokerage account

Here are situations when your zero brokerage account may not exactly be a zero cost account.

Aug 26, 2020 08:08 IST India Infoline News Service

accountant calculating financial data
Investors normally feel thrilled when they get to operate a zero brokerage account. We tend to assume that zero brokerage account is a free account in the strict sense of the term. Actually a better term would be discount brokerage but zero brokerage account is more popular, largely because the idea is a lot more appealing. That leads to a practical problem.

People assume that a zero brokerage account is also a zero cost account. That is hardly the case because ultimately the broker also needs to meet expenses and also make a profit in the end. That would be impossible to do if everything was entirely free. That is why it is essential to read the fine print. Here are situations when your zero brokerage account may not exactly be a zero cost account.

Trading in all stock market products may not be free

That is where reading the fine print becomes critical. For example, if you look at some of the leading zero brokerage accounts, there are different models followed. Some brokers keep delivery brokerage close to zero while intraday trading is actually charged a higher brokerage. Trading in futures and options does entail a cost as there is a much higher risk involved. Normally, when brokers talk about zero brokerage, this applies only to trading in equities for delivery purposes. For trading in other products you still pay brokerage.

STT, stamp duty and turnover tax are charged on trade value

The GST that your broker charges in your contract note is based on the brokerage rate. So if I offer you zero brokerage on cash equities, then the GST will automatically be zero. However, there are other statutory charges that are based on the total value of trade and not on brokerage earned. For example, securities transaction tax (STT), SEBI turnover tax, exchange charges and stamp duties are charged on trade value. These will continue to be charged irrespective of whether the brokerage is zero or otherwise. So, the statutory cost will still be there, even if brokerage is technically zero.

Some brokers charge nominal brokerage for legal purposes

Many of the zero brokerage accounts do charge a very small and nominal brokerage for record purposes. This could be required to show revenues for their internal records. While, technically, this is termed as zero brokerage, it may actually result in a nominal rate of brokerage being charged and as a result some of the brokerage related statutory charges will also kick in, adding to your overall costs.
 
Non-trading related charges in the ledger

The best record of all costs debited to your account is available in the ledger account that the broker provides to you. If you review the ledger you will find that it includes a number of other charges apart from the brokerage and statutory charges. For example, if the DP and the broker are one and the same, then the demat charges are debited to your trading ledger. You can find the details in the narration. While demat account opening is free of cost, there are other charges that are payable in the case of demat account. For example, the annual maintenance charges or AMC is payable each year and if the broker / DP does not have a linked bank interface, then the amount is debited to the ledger account.

For every sale from your demat account, there is a charge that NSDL / CDSL debits on the depository participant. This also gets passed on to you and debited to the ledger account. There is one more interesting point. When you fund your trading account via NEFT / RTGS / IMPS / UPI, there is no charge levied by the broker. However, if you choose the payment gateway, then a nominal sum is debited. Similarly, outstation cheques can also entail charges. All these will mean that your zero brokerage account is not exactly zero cost.

Check whether zero brokerage is conditional

Quite often, the broker will offer you zero brokerage subject to achieving basic minimum volumes of trade. There are two ways they do it. Either they charge you brokerage and then give you a rebate each month or they don’t charge you but impose the cost in bulk. Normally, the first method is more popular. If you do not achieve the volume targets then you don’t exactly get to enjoy zero brokerage.

The moral of the story is that the devil lies in the detail. When you open the so called “zero brokerage account”, it behoves upon you to read the contract in detail and go through the fine print, especially the section that lays out the rates of brokerage. This section normally lays out all the conditions, the exceptions and the costs involved. Nobody can really offer you the trading platform at zero cost. It is just that you must know fully well; what and why you are being charged.

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