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How Are ETFs Taxed in India? Taxation Rules, Rates & Benefits Explained
Introduction
An Exchange Traded Funds (ETFs) is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. ETFs are known for their low cost, flexibility, and transparency. But before investing, it’s essential to understand how ETFs are taxed in India, as taxation can affect your overall returns. Whether you're holding equity ETFs, debt ETFs, or gold ETFs, different tax rules apply. This guide breaks down the ETF taxation structure in India, including applicable tax rates, holding periods, and potential tax benefits.
Types of ETFs and Their Tax Treatment
In India, the tax treatment of an ETF depends on the category of underlying assets:
1. Equity ETFs
- Track indices like Nifty 50, Sensex, Nifty Next 50
- Treated as equity-oriented investments
2. Debt ETFs
- Invest in government bonds, PSU debt, or corporate debt
- Treated as debt-oriented investments
3. Gold ETFs
- Invest in physical gold (99.5% purity)
- Taxed similarly to non-equity mutual funds
Taxation of Equity ETFs
- Short-Term Capital Gains (STCG): If held for less than 12 months, taxed at 20%
- Long-Term Capital Gains (LTCG): If held for more than 12 months, gains above ₹1 lakh per year are taxed at 12.5% (without indexation) (Please note that the percentage is as on date and may vary over due course of time, so we kindly recommend you to seek advice from tax advisor before you take any/refrain from any action)
Example: If you sell an equity ETF after 15 months with ₹1.5 lakh in profit:
- First ₹1 lakh is exempt
- Remaining ₹50,000 taxed at 12.5% = ₹6,250
Taxation of Debt ETFs and Gold ETFs
As per current income tax rules (effective April 1, 2023), capital gains from Debt ETFs and Gold ETFs are taxed as per your applicable income tax slab, regardless of the holding period. Indexation benefit is no longer available for units purchased after this date.
Tax laws are subject to change. We recommend consulting a qualified tax advisor before making any investment decisions.
ETF Tax Benefits for Investors
- Efficient Tax Planning: Equity ETFs allow tax-efficient wealth creation over the long term
- Indexation for Debt/Gold ETFs: Lowers taxable gains in inflationary periods
- No Entry/Exit Load: Reduces transaction costs compared to traditional mutual funds
How to Declare ETF Gains in ITR
- Use ITR-2 or ITR-3 depending on your income sources
- Disclose under ‘Capital Gains’ schedule
- Report STCG and LTCG separately for equity and non-equity ETFs
Conclusion
Understanding the tax implications of ETFs in India is crucial for accurate return calculation and compliance. While equity ETFs enjoy favourable tax treatment, debt and gold ETFs offer benefits like indexation. Planning your holding period and type of ETF investment can significantly impact your post-tax returns.
Additional links
What is a Mutual Fund? - Beginner's Guide to Investing
AMFI - Introduction to Mutual Funds
Tax Regime Specific to Mutual Fund Investors in India
Saving Tax through Mutual Fund Investments
What is Mutual Fund? Learn the basics
Let’s Learn How to Invest in Securities Market
FAQ Section
Are ETFs taxable in India?
Yes, ETFs are subject to capital gains tax based on the holding period and type of underlying assets—equity, debt, or gold.
How are equity ETFs taxed?
Equity ETFs are taxed like equity mutual funds:
- Short-Term Capital Gains (STCG): 15% if held for less than 12 months
- Long-Term Capital Gains (LTCG): 10% if held for more than 12 months, but only on gains exceeding ₹1 lakh per financial year (no indexation benefit)
(Please note that the percentage is as on date and may vary over due course of time, so we kindly recommend you to seek advice from tax advisor before you take any/refrain from any action)
How are debt ETFs taxed differently?
As per current tax laws, capital gains from Debt ETFs (purchased on or after April 1, 2023) are taxed as per your income tax slab, irrespective of the holding period.
(Please note that the percentage is as on date and may vary over due course of time, so we kindly recommend you to seek advice from tax advisor before you take any/refrain from any action)
Do I have to pay tax if I don’t sell my ETF units?
No tax is applicable until you sell your ETF units and realize a capital gain.
What happens to ETF taxes if I transfer units between demat accounts?
Transferring between demat accounts (same PAN) is not treated as a sale and hence, is not taxable.
Are SIPs in ETFs taxed differently?
No. Each SIP installment is considered a separate investment, and taxation is based on the holding period of each.
Do I get indexation benefit in equity ETFs?
No. Indexation benefit is only applicable for non-equity ETFs like gold and debt ETFs when held for over 36 months.
Is dividend from ETFs taxed?
Yes. Dividends are taxed as per your income tax slab after Budget 2020, and are added to your total taxable income. (Please note that the percentage is as on date and may vary over due course of time, so we kindly recommend you to seek advice from tax advisor before you take any/refrain from any action)
Can I use capital losses from ETFs to offset other capital gains?
Yes. Short-term and long-term capital losses from ETFs can be set off against respective capital gains as per income tax rules.
Where should I report ETF gains in the ITR form?
Capital gains from ETFs should be reported in the ‘Capital Gains’ section of ITR-2 or ITR-3, depending on your income profile.
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The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
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