How are Exchange Traded Funds Taxed in India?

There are several investment products on offer here in India, catering to the financial needs of almost every individual. Investing is as important as saving because it gives you an opportunity to beat inflation and have enough money in your kitty to help you sustain in future. If you want to start investing, the first thing to do is to kick start your journey with financial planning. When you plan your finances effectively, it helps you set short term and long term goals and also gives you a clear idea of how to pursue those goals through smart investment.

If you are someone who is averse to risk and do not wish to expose their finances to the vagaries of the volatile market, it is better that you stick to traditional investment tools like PPFs or bank FDs. But these investments offer very low returns and if you are okay with it then you can go ahead and invest. But if you are someone who enjoys a high risk / reward offering schemes than you can consider the option of investing in mutual funds.

Mutual funds are professionally managed funds where fund houses collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy in stocks and other money market instruments like G-sec, corporate bonds, treasury bills, commercial paper, etc. Mutual funds are further categorized based on certain attributes like fund size, investment objective, risk profile, asset allocation, etc. Of the major mutual fund categories, exchange traded funds or ETFs have caught the attention of Indian investors in the recent past. If you wish to find out more about ETFs, read further.

What are Exchange Traded Funds?

Securities and Exchange Board of India (SEBI), the regulator of mutual funds in India defined ETFs as, “an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked).” Exchange traded funds follow their underlying benchmark, for example, SENSEX, NIFTY50, gold, real estate, etc.

Types of ETF in India

There are four major ETFs here in India. These are as follows:

Bank ETFs: Bank ETFs usually allocate their assets in stocks of listed banks. These ETFs are supposed to offer high liquidity and follow their underlying index as their benchmark.

Liquid ETFs: Liquid ETFs maintain a decent amount of liquidity by investing in, short-term G-secs, corporate bonds and other securities that come with a short maturity period.

Index ETFs: Index funds are a beneficial option for investors seeking long term capital gains. Index funds replicate the market movements of its underlying index with minimal tracking error. Like a Nifty ETF or SENSEX ETF funds.

Gold ETFs: Gold ETFs invests money in gold bullion and gold manufacturing units by trading their units on the stock exchange. SEBI defines Gold ETFs as “an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked)”.

Taxation on ETFs

Here is a table to help you understand how ETFs in India are taxed:

Parameter	Gold ETF	Index Fund	International ETF	Sector Specific ETF
Short Term Capital Gains (STCG) tax	As per the income tax slab you fall under	15 per cent	As per the income tax slab you fall under	15 per cent
Long Term Capital Gains (LTCG) tax	10 per cent without indexation or 20 per cent with indexation	No tax	10 per cent without indexation or 20 per cent with indexation	No tax