Exchange-traded funds were launched in India in the year 2002. There are various advantages of investing in ETFs over shares and mutual funds. An investor can spread the risk by investing in the equities of multiple companies instead of investing in equity shares of a single company having a higher risk. Investing in ETFs is beneficial over mutual funds due to reduced expenses and higher liquidity.
ETF: Meaning
ETF i.e. Exchange Traded Fund is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. Thus, it holds all the stocks in the same proportion as held by the underlying index. It is an Index Fund that is listed and traded on a stock exchange just like a stock. The trading value is based on the Net Asset Value (NAV) of the underlying asset. It is like a mutual fund that the investor can buy and sell on the stock exchange, unlike the normal mutual funds that the investor can buy and sell from the AMC. Income Tax on ETFs (Exchange Traded Funds) in India is similar to the tax treatment of mutual funds.
Types of Exchange-Traded Funds
The different types of ETFs can be classified based on the securities in which they invest. The following are types of ETFs:
- Equity ETF – ETFs that invest in equity shares and other equity-related instruments.
- Debt ETF – ETFs that invest in fixed-return securities like bonds and debentures.
- Gold ETF – ETFs that invest in physical gold assets.
- Currency ETF – ETFs that invest in currency instruments.
Taxability of Income from ETFs
Capital Gain on Sale of ETF (Exchange Traded Funds)
- Equity ETFs – Since these ETFs invest in equity-oriented instruments, the treatment is the same as equity shares.
- Long-Term Capital Gain (LTCG): Any gain arising on the sale of equity ETF held for more than 12 months is considered as Long-Term Capital Gain. It is taxed at the rate of 10% above INR 1,00,000.
- Short-Term Capital Gain (STCG): Any gain arising on the sale of equity ETF held for less than 12 months is considered as Short-Term Capital Gain. It is taxed at the rate of 15%.
- Other ETFs – ETFs where less than 35% of the funds are invested in the equity shares of domestic companies.
– When ETFs acquired after 1 April 2023:
The budget 2023 has brought about certain amendments which imply that a Specified ETF will no longer receive indexation benefits when computing long-term capital gains(LTCG). Therefore, ETFs where less than 35% of the funds are invested in the equity shares of domestic companies will now be taxed at the applicable slab rates.
– When ETFs acquired before 1 April 2023:- Long-Term Capital Gain (LTCG): Any gain arising on the sale of other ETFs held for more than 36 months is considered as Long-Term Capital Gain. These long-term capital gains are taxed at 20% with an indexation benefit.
- Short-Term Capital Gain (STCG): Any gain arising on the sale of other ETFs held for less than 36 months is considered as Short-Term Capital Gain. These short-term capital gains are taxed at Salb Rates.
Other Income from ETF (Exchange Traded Funds)
- Interest Income
- Taxable Income under the head Income From Other Sources (IFOS) at slab rates.
- Dividend Income
- In most cases, the dividend is reinvested in the scheme. However, the ETF Fund may decide to distribute dividends to the investors.
- Up to FY 2019-20 – Exempt Income.
- FY 2020-21 onwards – Taxable Income under the head Income From Other Sources (IFOS) at slab rates.
Income Tax on ETF (Exchange Traded Funds)
Income Tax on Trading in ETFs is similar to the tax treatment of mutual funds. The following are the income tax rates:
| Type of ETF | Period of Holding | Long-Term Capital Gain | Short-Term Capital Gain |
| Equity ETF | 12 months | 10% over INR 1,00,000 under Section 112A | 15% under Sec 111A |
| Other ETF | 36 months | Slab Rate | Slab Rates |
ITR Form, Due Date and Tax Audit Applicability for ETF Investors
- ITR Form: Trader should file ITR 2 (ITR for Capital Gains Income) on the Income Tax Website since income on the sale of ETFs is a Capital Gains Income.
- Due Date
- Up to FY 2019-20
31st July – for traders to whom Tax Audit is not applicable
30th September – for traders to whom Tax Audit is applicable - FY 2020-21 Onwards
31st July – for traders to whom Tax Audit is not applicable
31st October – for traders to whom Tax Audit is applicable
- Up to FY 2019-20
- Tax Audit: Since the income on the sale of ETFs is a Capital Gains Income, the taxpayer need not determine the applicability of tax audit under Section 44AB.
Carry Forward Loss for sale of ETFs
Gain or Loss on the sale of ETFs is a Capital Gain or Capital Loss. The rules for set-off and carry forward of losses on the sale of ETFs will be:
- The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Also, they can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
- The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. Further, they can carry forward the remaining loss for 8 years and set off against LTCG only.
FAQs
ETF is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. It is an Index Fund that is listed and traded on a stock exchange just like a stock. Therefore, it is a mutual fund that the investor can buy and sell on the stock exchange. IT on ETFs in India is similar to the tax treatment of mutual funds.
ETFs are better than Mutual Funds for the following reasons:
1. The investor can buy and sell an ETF directly on the stock exchange, unlike normal mutual funds.
2. Fees and investments in ETFs are lower than Mutual Funds since there is no fund manager to make investment decisions on behalf of the investor.
3. ETFs do not have a lock-in period and investors can sell them anytime. Mutual Funds like ELSS of 3 years reduce the liquidity of investors.
Gold ETFs are funds that invest in physical gold assets. Thus, the asset base of the ETF is 90 to 100% gold. They are traded on exchanges and offer better liquidity.
Gold funds are mutual funds that invest in gold ETFs and other related assets. They do not invest in physical gold but Gold ETFs.
LiquidBees are ETFs that track an index, commodity, bond, or block of assets. They are traded on the Stock exchange. LiquidBees is an open-ended liquid scheme with a daily dividend and compulsory re-investment of dividend options.
The units received in the form of dividends are taxed under Income from the other source and when you sell these units, the gain on such transfer is taxed under Income from capital gains.
Hi @Jitendra_Kumar,
You should calculate your advance tax liability for the financial year. If your income tax liability is above INR 10,000, you need to pay your advance tax. 15th March 2021 is the last date to pay your advance tax for the FY 2020-21.
Since you have Capital Gains income, you need to file ITR 2. The sue date for the same is 31st July 2021.
You can also use this tool to determine, which ITR form to file.
Thank you for the reply
I have 1 more doubt :
When calculating capital gains can i subtract brokerage or Exchange Transaction Charges or anything else that will reduce capital gains tax?
@Jitendra_Kumar,
You cannot claim brokerage expenses or other such charges from your capital gains. But, you can still claim transfer expenses such as stamp duty from your capital gains.
However, if you do intraday or F&O trading which is treated as business income for Income Tax purposes, you can claim the following expenses.
Hi @Aditya_s ,
CAMS will include only the folios with financial transactions. If in case any of your folios missing in the myCAMS login, please ensure that your email id is updated in all your Mutual Fund investments serviced by CAMS.
@Aakash_L can you help with this?
Hey @Abhijit_G ,
Could you send us your Karvy statement for FY20-21 at help@quicko.com so we can look at the upload issue?
Hey @Javed19, we are working on the same and will be released in the coming week. Stay tuned!
Hey @Abdul_Raquib, you can check out the response to your query at - Importing Trading Data from CAMS - #2 by Abdul_Raquib
@hiren_parekh
LTCG upto 1 lakh is exempt from tax. Still you can sell and buy on the same day without waiting for the next day.
Hope this helps!
I saw in Quicko an option wherein a Zerodha user can login via Kite and his TaxPnL is auto-populated by the click of a button and his annual STCG and LTCGs are calculated from his trades on Zerodha trading platform.
I was wondering whether the transactions done in Coin by Zerodha would also be tracked and its Gains/Losses would be also considered for annual STCG and LTCG during filing of returns?
Is there a feature like that in Quicko presently?