Taxation on equity, debt and international ETFs

Income Tax Income from Capital Gains
1

We know how mutual funds work right? They basically pool money from investors and then invest it in various types of assets. Now, what if you could trade these mutual fund units on the exchange just like stocks? You can do that with an ETF, or Exchange Traded Fund.

An ETF is a pooled investment vehicle that holds a set of securities like stocks, bonds, and commodities. Just like a stock, ETFs trade on the stock exchanges and you can buy-sell them anytime. Usually, ETFs track either an index, bond or commodity.

There could be various types of ETFs depending on the underlying asset. The most common ones are:

  • Equity ETFs: These ETFs primarily invest in stocks and aim to track the performance of a specific index like Nifty 50, BSE Sensex, etc.

  • Debt ETFs: These invest in fixed-income debt instruments like government bonds.

  • Commodity ETFs: These ETFs track the price of a commodity like gold, oil, etc.

  • International ETFs: These invest in companies outside of India and can track indices such as the S&P 500 or the NASDAQ.

How are capital gains from ETFs taxed?

The taxation of your gains from ETFs depends on the type of ETF and the date on which such ETF was bought. Your buy date is important because new laws were introduced affecting the taxation of ETFs purchased after 1st April 2023.

So, there could be 2 scenarios:

  • ETFs purchased before 1st April 2023.

Types of ETF and their taxation before 1st April 2023
Types of ETF and their taxation before 1st April 2023937×337 26.7 KB

  • ETFs purchased after 1st April 2023.

Types of ETF and their taxation after 1st April 2023
Types of ETF and their taxation after 1st April 2023950×297 23 KB

:bulb: If you receive any kind of interest or dividend from an ETF, that income will be categorised as ‘Income from other sources’ and taxed as per your applicable slab rate.

What if you make losses?

Well, if you have sold your ETFs for a loss,

  • In case of short-term losses, you can set them off against any other short-term and long-term gains that you have.
  • In case of long-term losses, you can set them off against any other long-term gains that you have.

If there are not enough gains in the current FY to set-off all of your losses, these can be carried forward for 8 years and can be set-off against any subsequent profits that you make.

Which ITR Form to file?

For reporting of capital gains, you will have to file ITR-2.

2

Hi @Surbhi_Pal

How tax is to be computed upon a zero-coupon bond issued by a corporate having a FV of 1,00,000 and issued at a price of 1,12,000 but bought in the secondary market at 1,08,000 and on maturity in the year 2027 being paid an amount of Rs.1,49,000

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Shouldn’t STCG be 20% and LTCG be 12.5% according to new rules on equities?

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Hi @Surbhi_Pal

Please help in replying to the above query

5

Hi @thethinker,

Yes, the tax rates will change after changes announced in budget 2024.

  • Equity ETFs: The tax rate will be 12.5% for LTCG and 20% for STCG. Holding period is 12 months.
  • Debt ETFs: Tax will be applicable as per the slab rate irrespective of the holding period.
  • Other ETFs (foreign ETFs, commodity ETFs): LTCG will be taxed at 12.5% whereas STCG will be taxable at applicable slab rate. The holding period to classify the gains as short-term or long-term will be 12 months.
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Hi @Surbhi_Pal

How tax is to be computed upon a zero-coupon bond issued by a corporate having a FV of 1,00,000 and issued at a price of 1,12,000 but bought in the secondary market at 1,08,000 and on maturity in the year 2027 being paid an amount of Rs.1,49,000

HI @Surbhi_Pal

Request your clarification for the above query. Thanks in advance

9

Hi @gdshan

Income from non-notified zero-coupon bonds issued by corporations is classified as interest income for tax purposes. The appreciation in value of these bonds—calculated as the difference between the maturity amount (INR 1,49,000) and the purchase price (INR 1,08,000)—is taxed under the head “Income from Other Sources.” This gain, amounting to INR 41,000, will be subject to taxation at the applicable income tax slab rate.