Looking for an investment that’s simple, flexible, and efficient? Exchange Traded Funds (ETFs) might just be what you need. Combining the best features of stocks and mutual funds, ETFs offer diversification, liquidity, and cost-efficiency.
They pool money like mutual funds but trade on exchanges like shares, tracking indices, commodities, or other assets. In India, you can choose from Equity ETFs like SBI Nifty 50 ETF, Debt ETFs like Bharat Bond ETF, or even Gold and International ETFs for inflation hedging and global exposure.
To truly make the most of your ETF investments, understanding their taxation on dividends and capital gains is key. This article breaks down ETF basics, income generation, 2025 tax treatment, and the process for filing ITR.
How to Earn from ETFs?
There are two ways to earn from ETF investments:
- Dividends: You can earn dividends from ETFs since they may hold stocks that pay dividends, which may be credited to your account or reinvested.
- Capitals Gains: ETFs trade on stock exchanges. They follow a passive strategy, and their prices change based on market supply and demand. You can realise capital gains when the price of an ETF rises during your holding period, allowing you to sell it at a profit.
Both dividends and capital gains are subject to taxation.
ETF Taxation 2025
Understanding how ETF taxation in India is important for making informed investment decisions and optimising returns.
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ETF Taxation in India- Dividend Income
Most ETFs reinvest the dividends they receive from their underlying stocks, but in India, a handful of ETFs have a track record of paying dividends. If an ETF does pay dividends, the process is similar to how companies distribute dividends to shareholders. The ETF announces a record date, and if you hold the ETF on that date, you are eligible to receive the dividend payout.
For resident individuals and Hindu Undivided Families (HUFs), the dividends are added to your total taxable income. The tax on these dividends is determined based on your applicable income tax slab rate. This makes it important to consider your tax bracket when investing in dividend-paying ETFs.
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ETF Taxation in India- Capital Gains
Capital gains can be classified as long-term or short-term, with the taxation differing based on the type of ETF and the duration of the investment.
| ETF Types | Short-Term Capital Gains (STCG) Taxation | Long-Term Capital Gains (LTCG) Taxation |
| Equity ETFs | 20% | 12.5% (without indexation) beyond LTCG of ₹1.25 lakh |
| Gold ETFs | Taxed as per income tax slab rate | 12.5% (without indexation) |
| Debt ETFs | Taxed as per income tax slab rate | Taxed as per income tax slab rate |
| Other Non-Equity ETFs | Taxed as per income tax slab rate | 12.5% (without indexation) |
ETF and Income Tax Returns (ITR)
If you earn income from ETFs, you must report it in your ITR and pay the applicable tax. The choice of the ITR form depends on your sources of income and the nature of ETF earnings. If your income from ETFs includes only capital gains, you need to file ITR-2 by 31st July. For those earning both capital gains from ETFs and income from salary or business, ITR-3 is required, with a filing deadline of 31st July or 30th September, depending on audit requirements.
If your total income from ETFs exceeds ₹50 lakh in a financial year, you must disclose your assets and liabilities in Schedule AL of the ITR form, and a surcharge will apply if income exceeds ₹2 crore. Additionally, losses from ETF sales can be carried forward for up to eight years to offset future gains, provided you file your ITR within the due date.
Conclusion
ETFs provide a flexible and cost-efficient way to invest across asset classes, making them a popular choice for diversifying portfolios. However, understanding their tax implications is crucial to optimising your returns and ensuring compliance with Indian tax laws.
Awareness of how dividends and capital gains are taxed enables better financial planning and helps you minimise tax outflows. Timely filing of the correct Income ITR form is not just about compliance—it’s a strategic move to unlock tax benefits while avoiding penalties.
By aligning your investment strategy with tax regulations, you can make the most of ETFs, leveraging their liquidity, diversification, and low costs to build a robust financial portfolio. A well-informed approach to taxation ensures that ETFs become not only a convenient investment option but also a valuable asset in achieving your long-term financial goals.
FAQs
What is the meaning of an ETF?
An ETF is a hybrid investment vehicle combining features of mutual funds and shares, allowing investors to trade on exchanges while pooling money to track indices, commodities, or other assets. In India, ETFs offer options like Equity ETFs (e.g., SBI Nifty 50 ETF), Debt ETFs (e.g., Bharat Bond ETF), Gold ETFs (e.g., HDFC Gold ETF), and International or Sectoral ETFs for diversified investment strategies.
How are ETFs taxed in India?
ETFs in India are taxed based on their type and the nature of income. While dividends are taxed as per your income tax slab rate, capital gains are classified as short-term or long-term, with rates varying by ETF type, such as 20% STCG and 12.5% LTCG for equity ETFs.
What is the tax treatment of silver ETF?
Silver ETFs are taxed as per your income tax slab rate for STCG. For LTCG, they are taxed at 12.5% without indexation benefits.
What is the tax treatment of gold ETF?
Gold ETFs are treated as non-equity investments for tax purposes. STCG is taxed as per your income tax slab rate, while LTCG is taxed at 12.5% without indexation benefits.
Do ETFs come under 80C in India?
ETFs under the Equity Linked Savings Scheme (ELSS) are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Investments in these ETFs can help reduce your taxable income by up to ₹1.5 lakh annually.
