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.
Click here to read more about taxation on ETF
Hope this helps!