How are exchange-traded funds (ETFs) taxed?

Slowly but surely, exchange-traded funds (ETFs) are coming to the mainstream. Due to their low costs ( expense ratio ), transparency and easy access to a variety of asset classes, investors are looking at ETFs as a valid investment option.

In the last financial year, between April 2024 and March 2025, ETFs received over Rs 80,000 crore of net inflows, compared to Rs 48,000 crore in the previous one. Given the increasing interest, let's look at how ETFs are taxed in India.

The good news is, unlike earlier, ETF taxation is now more streamlined.

Since July 2024, all ETFs — whether they invest in equities, bonds, commodities or global markets — are treated as long-term investments if held for more than one year. That's one rule for all, making it easier to track.

However, what hasn't changed is this: the actual tax you pay still depends on what the ETF invests in.

For instance, ETFs that invest in equity enjoy concessional tax treatment, while others like debt or international ETFs follow different taxation rules.

A key advantage of ETFs is that tax is only levied at the time of redemption, not every year. This allows investors to defer taxes, which is especially useful for those with a long-term horizon.

Tax on ETF dividends

Also, dividends from ETFs, if any, are added to your income and taxed at the applicable slab. Fund houses deduct 10 per cent TDS if your total dividend income from them crosses Rs 10,000 in a financial year.

What about Fund of Funds (FoFs) investing in ETFs?

FoFs don't always get the same tax treatment as the ETFs they invest in. Here's how they are taxed:

• Equity-oriented FoFs (investing at least 90 per cent in equity ETFs that, in turn, invest 90 per cent in domestic stocks): Taxed like equity funds--gains above Rs 1.25 lakh are taxed at 12.5 per cent if held for more than a year, and at 20 per cent if sold earlier.
• Debt-oriented FoFs (investing 65 per cent or more in funds holding mainly debt and money market instruments): Taxed like debt funds--gains are taxed as per your income slab.
• Gold, international and other FoFs: Gains are taxed at 12.5 per cent if held for more than 2 years; else taxed at slab rate.

An investor education and awareness initiative of Nippon India Mutual Fund.

Helpful Information for Mutual Fund Investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in For more info on KYC, change in various details and redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Also read: Nasdaq grows 9%. My ETF grows just 1.7%. Is this a scam?

This article was originally published on April 23, 2025.