Exchange Traded funds (ETF) are mutual funds or Index funds which are listed on stock exchanges and traded like regular stock. As they can be traded similar to a regular stock it is more convenient for investors to trade in ETF rather than a mutual fund for a shorter time span.
There are different types ETFs, some popular ETFs are
Equity Index ETF
Where funds are invested in capital market securities.
Gold ETF
Where funds are invested in dematerialized gold
Liquid ETF
Where funds are invested in Money Market securities like government bonds, treasury bonds, call money market etc.
Taxation on ETF would be straightforward as any Equity, Debt or Commodity Instrument which holds true for Equity Index funds and Gold ETFs where in the case of Liquid ETF the Interest is given back to the unit holders in the form of dividends.
When you receive a unit of Liquid BEES in the form of a dividend, it is taxed under Income from other sources. When you sell these units, the amount on which tax is already paid as a dividend is treated as the cost of acquisition and gains are then taxed under Income from Capital gains. We don’t have to pay tax on the same income doubly.
Liquid Bees is to be reported as a Debt instrument as the unit price of the fund is derived from the securities from money market instruments.
It is considered as LTCG when units are sold after 12 months (equity ETFs)/ 36 months (other ETFs) of acquisition and STCG otherwise.
Long-term capital gain is taxed at 10% (equity ETF)/ 20% (other ETF) with indexation and short-term capital gain is taxed at 15% (equity ETF)/ at slab rates as it is a debt instrument and no STT is deducted.
I have some sale and purchase of LiquidBEES in the previous FY whereby transactions updated from Zerodha are being tagged as Equity transactions for the purposes of Capital Gains calculations. Because of this, I have 2 major doubts.
LiquidBEES as a product does not fluctuate in price, and the only returns are through issue of additional units as dividend (whereby TDS will be charged if dividend is >5K- which has been charged for me). Since there is no fluctuation in price (and entire return is in form of dividends which I have declared anyway), where does the question of Capital Gains arise?
If I assume that the constant price does not always hold true, and there are always some fluctuations (howsoever minor) from the constant price in day to day transactions, Capital Gains can still be calculated. But even in that case, are LiquidBEES to be treated as Equity ETF or Debt ETF?
Hey, the dividend you receive is a part of your taxable income. However, if TDS has already been deducted from it, you will be able to claim tax credits while filing ITR. Hope this helps
Well, one thing I observed is, the dividends from liquidbees are showing up in Equity capital gains when I connect with zerodha. And when I integrate my ITR account, it gets added to dividend as well. So does that mean it gets added twice to my taxable income? One time as capital gains? And the second time as dividend income?
When you receive a unit of LiquidBEES in form of dividend, it is taxed under Income from other sources. When you sell these units, the amount on which tax is already paid as dividend is treated as cost of acquisition and gains are then taxed under Income from Capital gains. We don’t have to doubly pay tax on same income.
On Quicko’s platform, when you use the integration with Zerodha the income from capital gain is imported, whereas when you import data using Prefill JSON downloaded from the Income tax website the dividends are fetched.
As a follow up question to this one, if a son receives shares as a gift from father (direct blood relation) and sells them at a later date how should the capital gains tax be computed if the shares are LIQUIDBEES/LIQUIDETFs?
For eg, If the son receives 1000 LIQUIDBEES/LIQUIDETFs as a gift from the father then when the son sells those shares will he have to pay any capital gain tax on them?
Also what about shares other than LIQUID funds? How should one think about the acquisition price ?
If a son receives shares as a gift from his father, then the capital gains shall be taxed in the hands of the son. Here’s a read on Tax on Gifted Shares & Securities - Learn by Quicko for your better understanding of tax computation.
For shares other than Liquid funds, the acquisition price shall be taken into consideration in the same way as discussed in the above read on tax on gifted shares & securities.
The tax treatment on Gold ETF would be similar to other capital assets.
Short-Term Capital Gain (STCG): Any gain arising on the sale of Gold ETFs held for less than 36 months is considered as Short-Term Capital Gain, which would be taxed at slab rates of the unit holder.
The tax treatment on Gold Bees or ETF would be treated as short-term capital gains if it is sold within 36 months of the time period, which would be taxed at slab rates of the unit holder.
Gold ETFs are treated as debt instruments (other ETFs). And any short-term capital gain (STCG) arising on the sale of other ETFs is taxed at slab rates.
If the STCG arises on the sale of equity ETFs then, it is taxed at 15% as a special rate.
Equity ETFs – ETFs that are invested in equity-oriented instruments. Other ETFs – ETFs include, such as Gold ETF, International ETF, Debt ETF, etc.
