Taxation on equity, debt and international ETFs

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.

  • ETFs purchased after 1st April 2023.

: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.