Income Tax on ETF (Exchange Traded Funds) in India

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Sakshi Shah

Capital Gains
ETF
ITR-2
Trading Income

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 of the ETF 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 ETF (Exchange Traded Funds) in India is similar to the tax treatment of mutual funds.

ITR for Capital Gains from Investment in ETFs
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ITR for Capital Gains from Investment in ETFs
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Income Heads for Income from ETFs

Capital Gain on Sale of ETF (Exchange Traded Funds)

  1. Equity ETF – 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.
    • 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.
  2. Other ETF – ETFs such as Gold ETF, International ETF, Debt ETF, etc has tax treatment similar to other capital assets.
    • Long Term Capital Gain (LTCG): Any gain arising on the sale of other ETF held for more than 36 months is considered as Long Term Capital Gain.
    • Short Term Capital Gain (STCG): Any gain arising on the sale of other ETF held for less than 36 months is considered as Short Term Capital Gain.

Other Income from ETF (Exchange Traded Funds)

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Income Tax on ETF (Exchange Traded Funds)

Income Tax on Trading in ETFs is similar to tax treatment of mutual funds. 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% in excess of Rs. 1,00,000 under Sec 112A 15% under Sec 111A
Other ETF 36 months 20% with Indexation Slab Rates
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ITR Form, Due Date and Tax Audit Applicability for ETF Investors

FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020
Tip
FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020

Carry Forward Loss for sale of ETFs

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FAQs

How do I report income from sale of ETFs in the Income Tax Return i.e. ITR?

A trader 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. The remaining loss can be carried forward for 8 years

Is ETF a better investment option than 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 the normal mutual funds that the investor can buy and sell from the AMC.
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 like mutual funds. The investor 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.

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