How are ETFs Taxed in India?

Ever since their launch in India in 2002, Exchange Traded Funds or ETFs have evolved as a popular investment avenue. It is a basket of securities that usually tracks an underlying index and follows the passive investment method. The fund manager does not try to beat the market but replicate the returns offered by the index. However, before you invest in any instrument, it is important to understand the tax liability arising from income or gains generated by your investment. Today, we will talk about the taxation laws surrounding ETFs in India.

Avenues to Earn Money Using ETFs

Before we start looking at the taxation rules surrounding ETFs, let’s look at the different ways in which you can earn money using them.

An ETF or an Exchange Traded Fund is a mutual fund that follows the passive investment strategy and tracks an underlying index. It can be traded in the secondary market of a stock exchange like shares at a price determined by the demand and supply in the market. ETFs are of different categories based on the securities they invest in. These are

1

Equity ETFs

that track a stock index and invest in equities or equity-related instruments

2

Debt ETFs

that track bonds and invest in fixed income securities

3

Gold ETFs

that track the actual price of gold and invest in gold

4

International ETFs

that track stock market indices from different countries around the globe



Each of these ETF types has different tax treatments. But, how do investors make money by investing in ETFs?



There are two to earn money using ETFs:

Dividend Income Capital Gains

Tax on ETFs in India

Let’s look at the taxation rules for both dividends and capital gains in India: