Tax on ETFs depends on the type of income and the nature of the underlying asset.
Dividend income tax – Income from dividends is taxed as per the investor’s income tax slab rate.
Capital gain tax – In the case of capital gains, the taxation is different for equity and other ETFs, as follows:
On equity
For equity ETFs short-term capital gains for a holding period of less than one year, a 15% flat tax rate is applied.
For long-term gains for a holding of more than 12 months, a 10% tax applies on capital gains generated over Rs. 1 lakh. No indexation benefits are offered.
On debt, gold, and other ETFs
The short-term capital gain for a holding period of less than 3 years is taxed as per the income tax slab rate of the investor.
For a holding period of more than 3 years, long-term capital gain tax is 20% with indexation.