ETF Taxation Explained: How Much Tax Do You Pay in India?

An ETF is a type of investment that holds a bunch of assets inside one product. It could contain stocks, bonds, gold, or a mix of these. You can trade ETFs on the stock exchange during market hours, just like stocks.

Since one ETF can spread your money across multiple assets, you do not have to buy everything separately just to diversify. Plus, ETFs usually come with lower costs and are pretty easy to start with (even if you are new to investing).

Buying an Exchange-Traded Fund (ETF) is pretty simple. But the moment returns start showing up, one question quietly crashes the party: how much tax will I actually pay on this?

Because in India, there are different categories of ETFs (equity, debt, gold & commodities, and international), and each one gets taxed differently. However, since July 2024, all categories of ETFs are treated as long-term if you hold them for more than one year.

This guide breaks down ETF taxation in India, so you know what you are earning after taxes.

Taxation On Equity ETFs

Equity ETFs usually hold 65% or more exposure to equity stocks. They basically let you invest in the stock market through an index (like Nifty or Sensex) or a sector, and you can buy or sell them anytime during market hours.

If you sell your equity ETF before 12 months, your profit gets counted as Short-term Capital Gain (STCG), and you pay 20% tax on it. But if you hold it for over 12 months, it is treated as Long-term Capital Gain (LTCG) and taxed at 12.5% with an exemption of ₹1.25 (across all equity investments).

Taxation On Debt ETFs

Debt ETFs invest in fixed-income instruments like:

• Government securities
• Debentures
• Certificate of Deposit
• Commercial papers

They’re usually seen as the “safer” side of ETFs because the returns are more stable and predictable. When the ETF holds government-backed papers, the risk of default is basically close to zero.

For debt ETFs bought after 1 April 2023, any profit is always treated as short-term and is taxed as per your income slab rate.

Taxation On Gold And Commodity ETFs

Commodity ETFs invest in commodities like gold, silver, platinum, etc. The price moves mainly based on commodity demand and supply.

If you hold your commodity ETF for less than 12 months, your profit gets counted as STCG and is taxed as per your income tax slab rate. But if you hold it for over 12 months, it is treated as LTCG and taxed at 12.5%.

International ETFs Taxation

International ETFs invest in foreign markets, like the US, Europe, China, or global indices. So instead of buying Indian stocks, you’re using one ETF to get exposure to companies and economies outside India.

International ETF taxation is the same as the taxation for commodity ETFs.

Comparison Table: ETF Taxation in India

ETF taxation can be confusing because each type follows slightly different rules.
So, here’s a quick table that compares equity, debt, gold/commodity, and international ETFs side by side:

Dividend Taxation Differences

Since ETFs can hold stocks, you can also get dividends from them. Some ETFs simply pay it out to your bank account, and some give an option to reinvest it back into the ETF.

Before 2021, there was a tax called DDT (Dividend Distribution Tax), which was a 15% tax on dividends before you received them. But since FY2021 onwards, DDT has been removed. Now, the dividend you earn is added to your annual income and taxed at your slab rate.

Tips To Minimise ETF Tax

ETF taxation can take a major chunk of your gains out of your pocket. However, some smart tax planning steps can help you:

Holding Period Strategy For LTCG Benefits

With equity ETFs, the easiest way to save tax is just holding them for longer. If you sell them after 12 months, your gains move to long-term (12.5%). It may be smarter to sell your ETFs in parts across different financial years so you can use the ₹1.25 lakh tax-free LTCG limit properly.

Using Tax-Loss Harvesting

If one ETF in your portfolio is making losses, it can actually be useful. Selling it lets you book the loss and reduce the tax on gains you made elsewhere (this is called tax-loss harvesting). Many people do this to realise their capital gains and lower their tax bill. If losses are more than gains, you can carry them forward to the next year.

Choosing Tax-Efficient ETFs

Some ETFs are more tax-friendly than others. Simple index ETFs usually don’t trade much because they only reshuffle when the index itself changes. Less buying and selling inside the ETF means fewer profits getting booked, and that means fewer taxable gains for you. Plus, since holdings stay for longer, gains (when they do happen) are more likely to fall into the LTCG, which is generally easier on the tax bill.

Consulting A Financial Advisor For Complex Investments

The moment you step into debt ETFs or international ETFs, the tax rules may seem confusing. To avoid costly mistakes like selling at the wrong time, missing a rule, or messing up loss adjustments, it's better to consult a financial advisor.

Conclusion

ETFs may be easy to buy, but returns are not just about what you earn; they are about what you keep. A tax rule can easily take a good return and make it feel average. So do not invest blindly just because an ETF looks good on paper. Always check what it holds, because that decides the Exchange-Traded Fund taxation you will have to pay.

Hold equity ETFs for more than a year if you can and plan your selling so you do not cross the ₹1.25 lakh long-term gains limit in one shot. And never ignore dividend tax. A little planning here genuinely puts more money in your pocket.

Sources:

Cleartax
SEBI
Value Research
Business Today
Scanx
Cleartax
CBDT