Read to know if exchange-traded funds pay dividends and how they are taxed
Are the dividends on ETFs credited to my account? Also, what is their tax treatment? - Anonymous
Dividends are shares of the profits received by the shareholders (equity scheme) of a company. Typically in India, ETFs (exchange-traded funds) don't pay out dividends to the investors. Instead, the proceeds received from the underlying securities are reinvested back into the scheme. In such cases, the ETFs outperform the benchmark for a short time span. Since the ETFs mimic the benchmark index, the difference between the returns of the scheme and that of the benchmark is called 'tracking error'.
A senior official from a leading fund house on condition of anonymity said, "In the past, we have seen some ETFs declaring dividends to the investors. But now dividends are only paid out by liquid ETFs and are credited to the investor's accounts."
Such dividends are taxed in the hands of investors after FY21. The applicable tax rate would be the same as the investor's income tax slab rate.