ETFs (Exchange Traded Funds) have become one of the popular investment tools in India. More investors are choosing them because they bring diversity, liquidity, and transparency. Because they trade like stocks yet hold baskets of assets, ETFs combine the advantages of both fund and stock investing.
In the Indian context, where passive investing is rising and costs do matter, ETF Tax becomes important.
What Are Exchange Traded Funds (ETFs)?
An ETF is an investment fund that trades on an exchange and tracks a basket of underlying assets, such as stocks, bonds, and gold. You buy and sell ETF units throughout the trading day exactly like a share. The price changes based on the underlying value and market demand.
Why Investors Prefer ETFs in India
- Low cost: Most ETFs have minimal expense ratios compared to traditional funds.
- Transparency: Holdings are published daily for most ETFs.
- Liquidity: You can trade them anytime during market hours.
- Diversification: A single ETF may cover entire indices, sectors, themes, or geographies.
- Tax efficiency: In many cases, ETFs can have favourable tax treatment (depending on type & holding period).
Types of ETFs in India
Not all ETFs are equal, and tax treatment depends heavily on what the ETF holds. In India, you commonly find four broad types.
Equity ETFs
These funds invest primarily in the Indian stock market equities. For example, an ETF that tracks the Nifty 50 or Sensex. Their tax treatment aligns closely with equity mutual funds because the underlying asset is equity.
Debt ETFs
These invest in debt securities, government bonds, corporate bonds, and bond indices. Tax rules differ markedly because debt is treated differently under Indian tax laws.
Gold ETFs
These hold physical gold or gold‐related instruments and are treated differently for tax compared with equity or debt ETFs. Investors looking for “gold exposure via ETF” use these often.
International ETFs
These ETFs invest outside India, in global stocks, indices, foreign bonds, gold overseas, international real estate, or commodities. Taxation of these can be more complex, since domestic rules, foreign tax credits, and classification play a role.
Taxation Rules for ETFs in India
Let’s dig into how ETFs Tax applies, depending on the type of ETF, holding period, and the nature of gains (short-term vs long-term).
Tax on Equity ETFs
Short-Term Capital Gains (STCG) Tax
If you hold an equity ETF for 12 months or less, any profit you make on sale is treated as STCG and taxed at 20% (for transactions on or after July 23, 2024) as per section 111A.
(Previously, the rate was 15%)
Long-Term Capital Gains (LTCG) Tax
For equity ETFs held for more than 12 months, gains above an exemption threshold (₹1.25 lakh) are taxed at 12.5% (for sales on or after July 23, 2024).
Tax on Debt ETFs
Short-Term Taxation (as per Income Tax Slab)
Debt ETFs, investments made on or after 1 April 2023, are taxed as per your income tax slab rate, regardless of holding period. No long-term benefit.
For holding periods earlier than that, earlier rules may apply (LTCG after 24 or 36 months), but for fresh investments, this new regime applies.
Long-Term Taxation with Indexation Benefits
For debt ETF units purchased before 1 April 2023 and held beyond the specified period, long-term capital gains may be taxed at a flat 12.5% or 20% without or with indexation (depending on past rules).
Tax on Gold ETFs
Tax Treatment Similar to Debt ETFs
For Gold ETFs purchased after March 31, 2025
STCG: Gold ETF units held for less than 12 months are added to your total income and taxed per your slab rate
LTCG: Profits on Gold ETF units held for more than 12 months are taxed at a flat rate of 12.5%
For Gold ETFs purchased before April 1, 2023
STCG: For units held for 12 months or less, gains are taxed at your income tax slab rate
LTCG: For units held for more than 12 months, gains are taxed at 12.5% without indexation.
Tax on International ETFs
Classification and Applicable Tax Rates
International ETFs are often treated as non-equity funds (if their equity exposure in India’s view is limited) or as “other” for tax. Gains are taxed at the slab rate unless they meet equity-oriented criteria. Some frameworks treat them as debt/non-equity; tax rate may be 20% (LTCG) with indexation where applicable.
Dividends from ETFs – How Are They Taxed?
ETFs also pay dividends or distribute income. How are those taxed?
Dividend Distribution in ETFs
If an ETF pays out dividends (often in a growth option you may not get, but a dividend/IDCW option you do), that payout is added to your taxable income and taxed as per your tax slab rate.
Tax Deducted at Source (TDS) on Dividends
If the dividend from an ETF exceeds ₹5,000, the fund may deduct TDS (for resident investors) at the applicable rate (currently 10% for dividends above the threshold) unless updated.
For non-residents, higher TDS may apply depending on tax treaties and the nature of the distribution.
Factors That Impact ETF Taxation
Several practical factors influence how much tax you pay on ETFs.
Holding Period and Its Importance
Holding period is one of the biggest levers. The difference between holding 11 months and 13 months in an equity ETF could shift the tax rate from 20% STCG to 12.5% LTCG. Holding debt or gold ETFs longer may or may not bring benefits depending on their purchase date.
Timing matters.
Indexation Benefits on Debt and Gold ETFs
For older units of debt or gold ETFs (purchased before 1 April 2023), indexation benefits could apply, meaning you adjust the cost of inflation, reducing taxable gains. Post the rule change, new units may not enjoy this.
Taxation for Resident vs. Non-Resident Investors
Residents and NRIs face different rules. NRIs may face special TDS burdens, and capital gains classification may differ. For example, new rules for AY 2025-26 ensure different treatment for NRIs in international/investment funds.
Also, foreign investors may not access certain exemptions applicable to resident individuals.
Strategies for Tax-Efficient ETF Investing
Tax rules are fixed, but strategy matters. Here are ways to use ETFs Tax rules to your advantage.
Choosing Between Growth and IDCW Options
Many ETFs give you a “Growth” option (no regular payout) and an “IDCW/Dividend” option (you get regular payouts). From a tax point, the growth option defers tax until redemption; the IDCW triggers dividend tax immediately. If you want to control when you pay tax, go for the growth option.
That small choice affects how and when the tax applies.
Long-Term Holding for Lower Taxes
For equity ETFs, aim to hold for more than 12 months to get LTCG at 12.5% rather than STCG at 20%. For debt/gold ETFs, check if your units qualify for old rules (with indexation) by holding longer if possible.
Don’t trade just for day-to-day gains; use horizon to your benefit.
Using ETFs in Retirement and Wealth Planning
ETFs can play a core role in retirement portfolios because they have tax-efficient structures. Use equity ETFs for growth, debt/gold ETFs for stability, while aligning with your tax bracket and horizon.
By aligning ETF strategy with tax rules, you keep more of what you earn.
Conclusion – Making Smart ETF Tax Decisions
ETFs offer an elegant way to access markets, diversify, trade easily, and pay less tax when you plan. But the key lies in understanding how ETFs Tax laws apply in India: type of ETF, holding period, purchase date, and investor status.
Whether you hold an equity ETF for 13 months, a debt ETF bought in 2022 for 30+ months, or an international ETF, your tax outcome will vary. Knowing the rules turns good investing into smart investing.
FAQs
Are ETFs taxed like mutual funds in India?
They are taxed similarly in many cases, but the tax rate and holding period depend on the underlying asset of the ETF. Equity ETFs align with equity mutual fund rules; debt/gold/international ETFs follow non-equity rules.
How is the tax different for equity ETFs and debt ETFs?
As a general rule, equity ETFs held over 12 months are taxed at 12.5% LTCG; if held ≤12 months, they attract 20% STCG. Debt ETFs purchased post April 1, 2023, are taxed at the income-tax slab rate regardless of holding period; older units may get LTCG with indexation.
Do I need to pay tax on ETF dividends separately?
Yes. Any dividend you receive from an ETF is added to your income and taxed at your normal slab rate. TDS may apply if the dividend crosses the specified threshold.
What is the holding period for long-term capital gains in ETFs?
For equity ETFs: more than 12 months. For debt/gold ETFs: depends on purchase date, older units may qualify for LTCG after 24 or 36 months; for units bought after April 1, 2023, LTCG benefit may not apply.
Verify purchase date and applicable rules.
Can NRIs invest in ETFs in India, and what taxes apply to them?
Yes, NRIs can invest. However, tax rules vary: different TDS rates, potential withholding, and, depending on when the investment was made, old vs new tax regimes may apply. NRIs must check tax treaty benefits and local regulations.
