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Exchange-Traded Funds (ETFs) have become increasingly popular among Indian investors due to their low cost, diversification benefits, and ease of trading. However, understanding how ETFs are taxed is essential before adding them to your portfolio. ETF taxation in India depends on various factors such as the type of ETF, holding period, nature of gains (capital or dividend), and reporting obligations. This article covers all the key aspects of ETF taxation to help you stay informed and compliant.
The tax implications for ETFs in India vary based on the category they belong to. Broadly, ETFs fall into two categories:
These invest primarily in equity shares of companies. To qualify as an equity-oriented ETF, at least 90% of the fund’s assets must be in equities.
These include debt ETFs, gold ETFs, and international ETFs. Their tax treatment differs from equity ETFs and falls under the category of non-equity mutual funds.
Capital gains taxation depends on the type of ETF and the holding period.
Short-Term Capital Gains (STCG):
If held for less than 12 months, gains are taxed at 15% (plus applicable surcharge and cess).
Long-Term Capital Gains (LTCG):
If held for more than 12 months, gains above ₹1 lakh in a financial year are taxed at 10% without indexation.
Short-Term Capital Gains:
If held for less than 36 months, gains are added to your income and taxed as per your applicable slab rate.
Long-Term Capital Gains:
If held for more than 36 months, gains are taxed at 20% with indexation benefits.
Here’s a quick breakdown of capital gains tax rules for ETFs:
| Type of ETF | Holding Period | STCG Rate | LTCG Rate |
|---|---|---|---|
Equity ETFs |
< 12 months |
15% |
10% (above ₹1 lakh, no indexation) |
Non-Equity ETFs |
< 36 months |
As per slab rate |
20% (with indexation) |
Dividend income from ETFs is taxable in the hands of the investor as per their income tax slab. The dividend distribution tax (DDT) was abolished in 2020, making it mandatory for investors to declare and pay tax on any dividend income received.
Asset Management Companies (AMCs) also deduct Tax Deducted at Source (TDS) at 10% if dividend income exceeds ₹5,000 in a financial year.
Accurate and timely reporting of ETF-related income is important to avoid compliance issues. Here are key things to remember:
Include capital gains in your ITR:
Gains from ETFs should be disclosed under ‘Capital Gains’ while filing your Income Tax Return.
Use the AIS and Form 26AS:
Verify that your dividend income and capital gains match the details provided in your Annual Information Statement (AIS) and Form 26AS.
Maintain transaction records:
Keep a record of purchase and sale transactions, dividend statements, and AMC tax reports to support your return.
Set off capital losses:
Short-term and long-term capital losses can be set off against respective gains and carried forward for up to 8 years.
ETFs are not subject to Goods and Services Tax (GST) at the time of purchase or sale. However, fund management charges and brokerage services attract GST, which may be indirectly borne by the investor.
Several variables influence how much tax you pay on ETF investments:
Type of ETF (Equity vs Non-Equity)
Holding period of the investment
Tax slab applicable to the investor
Timing of sale (before or after the cutoff period)
Capital losses that can be used to reduce taxable income
Understanding these factors helps in optimising returns after taxes.
To ensure compliance and avoid unnecessary tax burdens, investors should:
Not ignore dividend income, even if it’s small
Reconcile AMC data with their own brokerage statements
Avoid misclassifying the ETF type, which could lead to incorrect tax filing
Report gains even if no tax is due (for transparency and accuracy)
Taxation on ETFs in India is relatively straightforward but depends heavily on the type of ETF and the investor’s holding period. Equity and non-equity ETFs are taxed differently in terms of both capital gains and dividends. Being aware of these rules, and accurately reporting gains and income, is essential for staying compliant and optimising your post-tax returns. Always maintain accurate records and refer to official documentation or consult a tax expert for specific scenarios.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
ETFs in India are taxed in the same way as mutual funds, with capital gains and dividend taxation rules varying by equity or non-equity classification.
Equity ETFs held for more than one year attract a 10% tax on gains above ₹1 lakh, while non-equity ETFs become taxable after three years at 20% with indexation.
Dividends earned from ETFs are fully taxable as part of your total income and are charged according to your applicable income tax slab.
TDS at 10% is deducted on ETF dividends when the total dividend income in a financial year exceeds ₹5,000.
ETF capital gains must be reported under the ‘Capital Gains’ section, while ETF dividends should be declared under ‘Income from Other Sources’ in the income tax return.
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