Taxes on ETF

Exchange-Traded Funds (ETFs) have become a go-to investment option for Indians looking for low-cost exposure to equity, debt, gold, and more. But like any financial instrument, ETF returns are taxable.

So, how are ETFs taxed in India?

Let’s break it down by type—Equity ETFs, Debt ETFs, and Gold ETFs—with examples and tips to make your tax planning easier.

🧾 First: What Are ETFs, and Why Tax Treatment Varies

An ETF is a mutual fund that trades on stock exchanges like a stock. The type of ETF determines how it's taxed.

ETF Type	Underlying Asset	Tax Category
Equity ETF	Stocks / Equity	Capital Gains – Equity
Debt ETF	Bonds / Debt	Capital Gains – Debt
Gold ETF	Gold (Paper)	Capital Gains – Debt

📌 1. Tax on Equity ETFs

Equity ETFs are taxed like stocks and equity mutual funds, if they invest at least 90% in listed Indian equities.

🟢 Short-Term Capital Gains (STCG):

• If sold within 1 year
• Taxed at 15% flat

🔵 Long-Term Capital Gains (LTCG):

• If sold after 1 year
• First ₹1 lakh per year is tax-free
• Gains above ₹1 lakh taxed at 10% (without indexation)

💡 Example:
You invest ₹2 lakh in an equity ETF. A year later, it's worth ₹2.9 lakh.

• Gain = ₹90,000 → Tax = ₹0 (under ₹1 lakh exemption)

📌 2. Tax on Debt ETFs

Debt ETFs invest in government bonds, corporate bonds, etc. They’re taxed differently from equity ETFs.

🚨 As per Budget 2023 (effective April 1, 2023):

• Short-Term (less than 3 years):
  Taxed as per your income slab
• Long-Term (more than 3 years):
  Same as short-term
  ✅ No indexation benefit
  ✅ No separate LTCG rate

💡 Example:
You earn ₹30,000 from a Debt ETF held for 4 years. If you’re in the 30% tax slab, you’ll pay ₹9,000 tax.

📌 3. Tax on Gold ETFs

Gold ETFs are not treated as equity, even though they’re traded on exchanges.

💰 Tax Treatment:

• Held less than 3 years:
  Taxed as short-term capital gain at slab rate
• Held 3+ years:
  Taxed at 20% with indexation benefit

💡 Indexation adjusts the purchase price for inflation, reducing tax liability.

Example:
You buy Gold ETF for ₹1 lakh in 2020 and sell for ₹1.5 lakh in 2025.
With indexation, your taxable gain may reduce to ₹30,000 instead of ₹50,000.

🧮 Summary Table: ETF Taxation Rules

ETF Type	STCG Tax	LTCG Tax	Holding Period
Equity	15%	10% (above ₹1L, no indexation)	1 year
Debt	As per income slab	As per slab (no indexation)	3 years
Gold	As per income slab	20% with indexation	3 years

📄 Which ITR Form Should You Use?

• ITR-2: If you earn capital gains from ETFs and have no business income
• ITR-3: If ETF trades are frequent enough to be considered business (rare for most investors)

🔁 Can You Set Off ETF Losses?

Yes!

• Short-term losses can be adjusted against any capital gains
• Long-term losses can be adjusted only against long-term gains
• Losses can be carried forward for 8 years

💡 Pro Tips to Save Tax on ETFs

1. Hold Equity ETFs for more than a year to enjoy tax-free gains up to ₹1 lakh
2. Don’t churn debt or gold ETFs often—frequent selling may push you into higher tax
3. Use indexation wisely for gold ETFs held over 3 years
4. Track capital gains using your broker’s P&L reports for accurate filing

🎯 Final Word

ETFs are efficient, low-cost, and transparent—but tax rules can vary widely depending on what they track.
Whether you’re building a passive portfolio or diversifying across asset classes, knowing the tax impact can help you invest smarter.

FAQs

1. Are ETFs taxable in India?

Yes. All ETFs—equity, debt, and gold—are subject to capital gains tax depending on the holding period and asset class.

2. How is tax calculated on Equity ETFs?

If held for less than 1 year, the gain is taxed at 15% (STCG). If held for more than 1 year, gains above ₹1 lakh are taxed at 10% (LTCG).

3. Do Debt ETFs get indexation benefit?

No. Since Budget 2023, long-term capital gains on Debt ETFs are taxed as per income tax slab, with no indexation benefit.

4. How is Gold ETF taxed in India?

Gold ETFs are taxed as non-equity capital assets. If held for 3+ years, gains are taxed at 20% with indexation.

5. Which ITR form should I use to report ETF gains?

Use ITR-2 for capital gains from ETFs. Use ITR-3 if ETF trading is your business (uncommon for most retail investors).

6. Can I adjust ETF losses against other gains?

Yes. You can offset:

• Short-term losses against any capital gains
• Long-term losses only against long-term gains
  And carry forward unadjusted losses for up to 8 years.