How Are ETFs Taxed? A Simple Guide for Investors

Income from ETFs: Dividends vs Capital Gains

Before getting into tax rates, it's essential to differentiate how income is generated through ETFs:

Dividends: Some ETFs pass on dividends received from the underlying securities to investors. However, not all ETFs distribute dividends—many follow a growth model by reinvesting.

Capital Gains: When ETFs are bought at one price and sold at a higher price, the profit qualifies as a capital gain—either short-term or long-term, depending on the holding period and ETF category.

Both forms of income are taxed differently, and the type of ETF significantly affects the tax outcome.
 

Taxation of ETF Dividends in India (2025)

In India, dividends received from ETFs are treated the same as dividends from any other equity instrument.

Dividend Distribution: If an ETF declares a dividend and you are a unit holder on the record date, you will receive the payout directly in your account.

Tax Treatment: Dividends are taxable at the slab rate applicable to your total income. So, whether you fall in the 5%, 20%, or 30% slab, dividend income from ETFs is added to your overall taxable income and taxed accordingly.

Note: There is no dividend distribution tax (DDT) at the fund level. Investors themselves are liable to pay tax on dividend income.
 

Capital Gains Tax on ETF Trading – 2025 Rules

Capital gains from ETFs depend on two primary factors:

• The type of ETF (Equity, Debt, Gold, International)
• The holding period (short-term or long-term)

Here’s how it breaks down:

Equity ETFs

Short-Term (less than 12 months): Gains are taxed at 20%.

Long-Term (more than 12 months): Gains exceeding ₹1.25 lakh are taxed at 12.5%, with no indexation.

Debt ETFs (post-2023 changes)

After recent tax amendments, debt mutual funds and debt ETFs no longer enjoy indexation benefits.

Both STCG and LTCG are taxed at your applicable slab rate—making tax planning crucial.

Gold and International ETFs

These are treated as non-equity ETFs, and gains follow similar rules to debt ETFs for STCG.

LTCG for these is taxed at 12.5% flat, again without indexation.
 

Filing ITR for ETF Income

Whether you earn dividend income, capital gains, or both, ITR filing is mandatory if the taxable income exceeds the exemption limit.

ITR Form Selection

• ITR-2: If your income includes capital gains from ETFs, along with salary, house property, or other sources—but not from business or profession.
• ITR-3: Required if you're involved in trading ETFs as a business (i.e., frequent trading) or have business income along with ETF gains.

Reporting Capital Gains

Capital gains must be segregated based on:

• Type of ETF (equity or non-equity)
• Duration (short-term or long-term)
• Each of these needs to be disclosed separately in the Schedule CG of your ITR.
   

Dividend Income Reporting

All dividend income from ETFs should be disclosed under ‘Income from Other Sources’.

High-Value ETF Portfolios: Additional Disclosure Rules

• If your total income from all sources exceeds ₹50 lakh in a financial year, you must:
• Fill Schedule AL (Assets and Liabilities) in the ITR.
• Disclose investments in ETFs under the “Shares and Securities” section.

Further, if your total income exceeds ₹2 crore, applicable surcharges on tax will apply.

Loss Carry-Forward Rules for ETF Trading

Any losses from the sale of ETFs can be carried forward to offset against future gains. Key conditions:

• Short-Term Capital Loss (STCL): Can be set off against any capital gain (STCG or LTCG).
• Long-Term Capital Loss (LTCL): Can only be adjusted against long-term capital gains.

These losses can be carried forward for 8 assessment years, only if the ITR is filed within the due date.

Tax Planning Tips for ETF Investors

Here are a few advanced tax strategies:

• Use STCL to Offset Equity Gains: Book short-term losses from one ETF to offset gains from another to reduce tax liability.
• Timing of Sale: For equity ETFs, hold for at least 12 months to benefit from lower LTCG rates.
• Dividend vs Growth Option: If in a high tax slab, prefer growth ETFs over dividend-paying ones to avoid slab-based taxation.
• Segregate Trading and Investment Portfolios: If you actively trade ETFs, maintain a clear line between business income (speculative trading) and investment income for compliance.
   

Conclusion

As ETFs become a mainstay in Indian portfolios—spanning equity, debt, gold, and global markets—understanding their taxation is non-negotiable. With changes in debt fund taxation and LTCG limits for equity ETFs, investors must stay updated to optimise post-tax returns.

By aligning your trading style, investment horizon, and ETF selection with the right tax strategy and timely ITR filing, you ensure better capital efficiency and legal compliance.

ETFs may be simple in structure, but their taxation is layered. A well-informed approach can mean the difference between mediocre and maximised returns.