Brokerage houses are showering a plethora of freebies to encash investor interest in the ongoing stock market rally with 51 per cent investor wealth being added in the last one year to ₹101.92 lakh crore from ₹67.55 lakh crore.

On February 12, 2014, the Sensex was at 20,448. A year later it is at 28,805, up over 40 per cent.

Besides the usual waiver on account opening charges, brokers are attracting clients by offering them zero brokerage plans on losing trades and plans for a lump sum fee for a specified number of trades or a specific period.

Well below bps cap

According to the capital markets regulator, a broker cannot charge more than 2.5 per cent (250 basis points) of the trade value as brokerage.

The biggest full-service brokerages in the country offering both online and offline trading facilities charge between 40 and 75 basis points. Smaller brokerages start at about 25 bps and could go down to 10-15 bps based on the value of delivery-based transactions.

Intraday cash trades cost 4-12 bps at smaller brokerages, going down to even 1 bps if the trade value is high. For the F&O segment, it is between 3 and 5 bps and could go down to 1 based on value.

Motilal Oswal Financial Services said they charge 50 bps for delivery, 5 bps for intraday and equity derivatives each as card rates.

Vishal Gulechha, Head — Equity, ICICI Securities, said, “The entire system of the broker such as the dealer and the analyst has to work towards making the client profitable. We have observed that customers usually book small profits but wait for longer periods to recover losses. By charging brokerage only for winning trades, we have freed the customer of the burden of waiting for a longer time to recover losses and in the process risking a chance of making bigger losses.

“The message we wanted to convey is that unwanted churn does not help anyone.”

STT, upfront deposit

The government charges 12.36 per cent as service tax and education cess on the brokerage fee on each trade. The contract note generated at the end of every trade lists the charges you pay for the trade. While the service tax is a percentage of the brokerage, all other charges (securities transaction tax, SEBI and stock exchange charges and stamp duty) are a percentage of the trade value.

A senior executive at a multinational brokerage said, “Since brokerage is the fee for a service, service tax is only applicable when the fee itself is charged. Brokerage-free trades are then technically possible and all brokerage houses offer some variation of the no-brokerage plan.

“But this gets problematic in case of an upfront deposit that some brokerages charge. If you collect a deposit from the customer and then offer free trades, this becomes a case of service tax avoidance.”

Market experts, while conceding that offering a particular number of free trades every month is to lure clients, tend to question the legality of the free trade and zero brokerage offerings.

Amit Kumar Sarkar — Partner (Indirect tax/SEZ/GST), Grant Thornton India, said “Freebies are allowed in services akin to quantity discounts offered for goods as long as the contract between the two parties (broker and client) is clear.”

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