An ETF is an investment fund traded on stock exchanges, similar to individual stocks. ETFs have gained popularity in the Indian share market due to their ease of use, cost-effectiveness, and flexibility. They are available to buy and sell on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). At a relatively low cost, ETFs offer exposure to a diversified portfolio of securities, such as stocks, bonds, and commodities.
As a result, ETFs have become a popular investment option for those looking to diversify their portfolio and take advantage of the growth potential of the stock market. Additionally, their popularity is credited to the stock market indices such as SENSEX and NIFTY crossing new heights.
Investors looking to invest in ETFs can open a demat account online for free. If you’re new to investing and wondering, “What is a demat account?” – it’s essentially a digital account used to hold and trade securities electronically. It is a safe and convenient way to invest in ETFs and other securities. However, before you start investing, it is crucial to understand how ETFs are taxed in India.
How Are ETFs Taxed in India?
The taxation structure for ETFs in India is based on its types–equity-linked and non-equity-linked ETFs. Furthermore, the tax percentage and applicability depend on the investors’ holding period and the tax bracket.
- Short-term capital gains: If you sell ETF units within one year of purchase, any gains will be considered Short-term Capital Gains (STCG). STCG is taxed at the applicable income tax rate.
- Long-term capital gains: If you sell ETF units after holding them for over a year, these gains qualify as Long-term Capital Gains (LTCG). LTCG on equity ETFs is taxed at a flat rate of 10% without indexation or 20% with indexation, whichever is lower. For debt ETFs, the LTCG tax rate is the same as the applicable income tax rate, with indexation benefits.
- Dividend distribution tax (DDT): ETFs may distribute dividends to investors which are subject to DDT. Currently, DDT on equity ETFs is 11.648%, and for debt ETFs, it is 29.12%.
Tax-saving ETFs
ELSS ETFs are a type of equity-linked mutual fund that offers investors the dual benefit of tax savings and potential capital appreciation. ELSS ETFs invest primarily in equity stocks and have a lock-in period of 3 years, making them an attractive option for investors looking to save taxes and build wealth over the long term.
Long-term capital gains (LTCG) from ELSS ETFs are taxed at 10% if they exceed Rs. 1 lakh in a financial year, while short-term capital gains (STCG) are taxed at the investor’s marginal tax rate. Additionally, ELSS ETFs are subject to a 10% dividend distribution tax (DDT) deducted at source by the fund manager.
Investing in ELSS ETFs can reduce your tax liability and benefit from the potential growth of the stock market. However, it’s important to research and choose the right ELSS ETF that aligns with your investment goals and risk appetite.
Conclusion
ETFs can be a convenient and cost-effective way to gain exposure to a diversified portfolio of assets while also enjoying the flexibility and liquidity benefits of trading on an exchange.
Through free demat account opening, you can invest in tax-saving ETFs like ELSS ETFs through your preferred stockbroker. Since ETFs are listed on the stock exchanges such as NSE and BSE, you can easily buy and sell them through the demat account at your convenience. This way, you can enjoy the benefits of tax savings, diversification, and potential capital appreciation, all while keeping your tax liability in check.
