Exchange Traded Funds (ETFs) started in India in 2002. The first ETF was launched by Nippon India Mutual Fund (formerly Benchmark Asset Management Company Ltd) on the Nifty 50 Index. It was listed on the NSE on January 8, 2002, and saw trading worth ₹1.30 crores on its first day. Exchange-traded funds, or ETFs, have gained popularity among investors in India due to their diversification, liquidity, and cost-effectiveness.
Did you know there’s been an update regarding taxes on ETFs in India? It’s worth checking out to see how you might save a little on ETF tax!
Let us show you the ETF tax benefits in India for 2024.
Understanding ETFs in India
Exchange-traded funds, or ETFs, are a popular investment choice due to their unique structure.
ETFs are investment funds traded on stock exchanges, similar to individual stocks. They let investors access a diversified portfolio of stocks, bonds, or other assets. Over the years, the ETF market in India has expanded significantly, with many new ETFs launched.
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Before we understand the tax rules for ETFs in India, let’s take a quick look at the types of ETFs.
Types of ETFs You Can Invest In
In India, there are various types of ETFs you can choose from:
- Equity ETFs: These are passive investments that mirror stock market indices, investing in stocks in the same proportion as the index.
- Debt ETFs: Similar to equity ETFs, these provide exposure to a collection of bonds and other debt instruments.
- Gold/Silver ETFs: These ETFs are linked to the prices of gold or silver and invest in physical bullion. This ensures transparency in the holdings based on current prices.
- Global ETFs: These focus on foreign securities, either tracking global markets or specific country indices.
Ways to Earn Money with ETFs
ETFs invest in stocks using a passive strategy, tracking an underlying index. Investors can earn money from ETFs in two ways:
- Dividends: Since ETFs hold a mix of securities, you can earn dividends similar to those from individual stocks.
Some fund houses allow you to either receive these dividends directly or reinvest them in the ETF for potentially higher returns later. These dividends are subject to ETF tax benefits.
- Capital Gains: When you buy and sell ETFs, the price you pay is influenced by market demand.
If the fund’s price rises during your investment period and you sell it for a profit, that profit is considered a capital gain and is taxable.
ETF Taxation 2024
| Type of ETF | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
| Equity ETFs | 20% | 12.5% (without indexation) |
| Gold ETFs | Taxed as per income tax slab rate | 12.5% (without indexation) |
| Debt ETFs | Taxed as per income tax slab rate | Taxed as per income tax slab rate |
| Other Non-Equity ETFs | Taxed as per income tax slab rate | 12.5% (without indexation) |
Key Points:
- Short-Term Capital Gains (STCG): From stocks, equity funds, and units of business trusts (like InvITs and REITs) will be taxed at 20%.
- Long-Term Capital Gains (LTCG): For all asset classes, LTCG is uniformly taxed at 12.5% without indexation benefits, effective from July 23, 2024.
- Debt Funds: Profits from debt mutual funds and debt ETFs are taxed as per the investor’s slab rate, irrespective of the holding period.
Tax on ETF in India- Dividend Income
This tax is known as the dividend distribution tax (DDT). Before the financial year 2020-2021, a 15% DDT was applied to all dividends. However, starting in FY 2020-21, DDT was removed, and dividend income is now added to your total annual income, taxed according to your income tax slab.
Tax on ETF in India- Capital Gains
Capital gains can be classified as short-term or long-term, and the tax rules differ based on the type of ETF.
- For Equity ETFs: These funds mainly invest in stocks. If you sell stocks held for less than a year, it’s considered a short-term capital gain.
If you hold them for more than a year, it’s a long-term gain. According to section 112A of the Income Tax Act, you can deduct up to ₹1 lakh of long-term capital gains from taxes, with a 10% tax on any amount above that, without indexation benefits. Short-term capital gains are taxed at 15% under section 111A, along with any applicable surcharges and cesses.
- For Gold, Debt, and Other ETFs: The tax rules are similar for these types of ETFs. Short-term capital gains apply to assets sold within three years, while long-term gains apply to those held for over three years.
Long-term capital gains for gold, debt, or international ETFs are taxed at 20%, with indexation benefits. Short-term gains are added to your annual income and taxed according to your income tax slab.
Here’s a summary of the new tax on ETF in India as per the 2024 budget:
- Long-Term Capital Gains (LTCG):
LTCG will be uniformly taxed at 12.5% for all classes of assets, with the indexation benefit removed. This is effective from July 23, 2024.
Previously, LTCG was taxed at 20% with indexation and 10% without.
- Short-Term Capital Gains (STCG):
STCG from stocks, equity funds, and units of business trusts (like InvITs and REITs) will now be taxed at 20%, up from 15%. This change is also effective from July 23, 2024.
For other assets, the STCG rate remains unchanged.
- Debt Funds and ETFs:
Profits from debt mutual funds, debt ETFs, and similar instruments will continue to be taxed according to the investor’s slab rate, regardless of the holding period.
- Holding Period for Mutual Funds:
Gains from equity mutual funds held for 12 months or less are considered short-term, while those held for more than 12 months are long-term.
For other mutual funds, a holding period of less than 24 months classifies gains as short-term, while more than 24 months classifies them as long-term.
How are ETFs taxed in India?
The taxation of ETFs in India is determined by two key factors: the type of ETF and the holding period of the investment. The type of ETF relates to the underlying asset class, which can be broadly categorised into equity, gold, and others.
- Equity ETFs invest in equity shares.
- Gold ETFs deal with physical gold assets.
- Other ETFs cover various financial instruments, including fixed-income securities, currencies, commodities, and international indices.
The holding period of an ETF refers to the duration for which an investor holds the ETF before selling it. This holding period dictates whether the capital gain from the sale is categorised as long-term or short-term.
- Long-term capital gain (LTCG) is applicable when the holding period is over 12 months for equity ETFs and 36 months for other ETFs.
- Short-term capital gain (STCG) occurs when the holding period is less than or equal to 12 months for equity ETFs and 36 months for other ETFs.
In addition to capital gains, dividends are another source of income from ETFs. These periodic payouts to investors are taxable based on their income tax slab rates, with no dividend distribution tax (DDT) applied to ETFs.
What are the tax benefits of investing in ETFs?
There are multiple ETF tax benefits in India:
- Tax Efficiency: ETFs are more tax-efficient than other mutual funds due to lower portfolio turnover and expense ratios. Lower turnover results in reduced capital gains, tax liabilities and transaction costs.
Meanwhile, a lower expense ratio translates to lower fund management costs and higher investor returns.
- Indexation Benefit: ETFs are eligible for indexation benefit, allowing the acquisition cost to be adjusted for inflation when calculating capital gains.
This reduces the taxable capital gain and the associated tax liability.
- Tax Deduction under Section 80C: If ETFs are part of the Equity Linked Savings Scheme (ELSS), they qualify for a tax deduction under Section 80C of the Income Tax Act, 1961.
ELSS is an equity mutual fund with a lock-in period of three years, enabling investors to save up to Rs. 1.5 lakh per financial year.
Filing Income Tax Returns for ETFs
Investors with income from ETFs must report it in their income tax return (ITR) and pay the relevant tax. The specific ITR form and due date depend on the nature and amount of income from ETFs and other sources.
- For investors with only capital gain income from ETFs, using ITR-2 and filing by the 31st of July is applicable.
- Those with both capital gain income from ETFs and other income types, such as salary or business income, should use ITR-3 and meet the deadline of either the 31st of July or the 30th of September, depending on audit requirements.
Investors earning over Rs. 50 lakh in a financial year from ETFs must disclose their assets and liabilities in Schedule AL of the ITR form. If the income from ETFs exceeds Rs. 2 crore, they will incur a surcharge on their tax liability.
In case of a loss from ETF sales, investors can carry it forward for up to eight assessment years to offset against future capital gains. However, adhering to the due date for filing the ITR is crucial to claim this benefit.
Conclusion
ETFs have become a preferred investment option for many due to their diversity, ease of trading, and higher liquidity than mutual funds. Exchange Traded Funds (ETFs) offer a smart investment method with various tax benefits. Understanding how ETFs are taxed—whether it’s through capital gains or dividends—can help you make better financial decisions.
As you explore ETFs in 2024, keep these ETF tax rules in mind to maximise your returns!
FAQs | Tax on ETF in India
ETFs provide several tax benefits, including exemptions on long-term capital gains (LTCG) up to Rs. 1 lakh and lower tax rates on gains exceeding this threshold.
STCG on ETFs is taxed at 20% for equity ETFs under section 111A, while for other ETFs, it is taxed at the individual’s applicable income tax slab rate.
Short-term gains are taxed according to the investor’s slab rate, while long-term gains are taxed at 12.5% without indexation.
Yes, you can offset losses from one ETF against gains from another ETF, effectively reducing your overall tax liability.
Yes, certain tax-saving ETFs, such as Equity-Linked Savings Schemes (ELSS) ETFs, offer deductions under Section 80C of the Income Tax Act.
While there are no specific tax deductions for ETFs, they offer tax benefits through exemptions and lower tax rates on LTCG.
ETF investments themselves do not qualify for deductions under Section 80C, but tax-saving ETFs like ELSS ETFs offer deductions.
Source: TheEconomicsTimes
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.