Income Tax on ETF (Exchange Traded Funds) in India
Exchange-Traded Funds were launched in India in the year 2002. There are advantages of investing in ETF 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 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 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.
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.
How do I report income from sale of ETFs in the Income Tax Return i.e. ITR?
Traders should file ITR-2 and report income from sale of ETFs as Capital Gains. – Equity ETF – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%. – Other ETF – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates. The investor can set off LTCL with LTCG and STCL with both STCG and LTCG, remaining loss can be carried forward for 8 years
Is ETF a better investment option than Mutual Funds?
Yes. 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 the 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 it anytime. Mutual Funds like ELSS of 3 years reduces the liquidity of investors.
In the case of Mutual Funds, it is managed by an experienced Fund Manager who makes investment decisions for the investors. No such decision-maker is available in the case of ETFs.
How are Gold ETFs different from Gold Mutual Funds?
Gold ETFs are funds that invest in physical gold assets. Thus, 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.
What is ETF Fund?
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.