Sakshi Shah
Capital Gains
ETF
ITR-2
Trading Income
Last updated on February 8th, 2023
Exchange-Traded Funds were launched in India in the year 2002. There are advantages of investing in ETFs over shares and mutual funds. An investor can spread the risk by investing in the equities of multiple companies instead of investing in equity shares of a single company having a higher risk. Investing in ETFs is beneficial over mutual funds due to reduced expenses and higher liquidity.
INDEX
- What is ETF?
- Types of Exchange Traded Funds (ETF)
- Income Heads for Income from ETFs
- Capital Gain on Sale of ETF (Exchange Traded Funds)
- Other Income from ETF (Exchange Traded Funds)
- Income Tax on ETF (Exchange Traded Funds)
- ITR Form, Due Date and Tax Audit Applicability for ETF Investors
- Carry Forward Loss for sale of ETFs
- FAQs
What is ETF?
ETF i.e. Exchange Traded Fund is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. Thus, it holds all the stocks in the same proportion as held by the underlying index. It is an Index Fund that is listed and traded on a stock exchange just like a stock. The trading value is based on the Net Asset Value (NAV) of the underlying asset. It is a mutual fund that the investor can buy and sell on the stock exchange, unlike the normal mutual funds that the investor can buy and sell from the AMC. Income Tax on ETFs (Exchange Traded Funds) in India is similar to the tax treatment of mutual funds.
Types of Exchange Traded Funds (ETF)
The different types of ETFs can be classified on the basis of the securities in which they invest. The following are types of ETFs:
- Equity ETF – ETFs that invest in equity shares and other equity-related instruments.
- Debt ETF – ETFs that invest in fixed-return securities like bonds and debentures.
- Gold ETF – ETFs that invest in physical gold assets.
- Currency ETF – ETFs that invest in currency instruments.
Income Heads for Income from ETFs
Capital Gain on Sale of ETF (Exchange Traded Funds)
- Equity ETFs – Since these ETFs invest in equity-oriented instruments, the treatment is the same as equity shares.
- Long-Term Capital Gain (LTCG): Any gain arising on the sale of equity ETF held for more than 12 months is considered as Long-Term Capital Gain.
- Short-Term Capital Gain (STCG): Any gain arising on the sale of equity ETF held for less than 12 months is considered as Short-Term Capital Gain.
- Other ETFs – ETFs such as Gold ETF, International ETF, Debt ETF, etc have tax treatment similar to other capital assets.
- Long-Term Capital Gain (LTCG): Any gain arising on the sale of other ETFs held for more than 36 months is considered as Long-Term Capital Gain.
- Short-Term Capital Gain (STCG): Any gain arising on the sale of other ETFs held for less than 36 months is considered as Short-Term Capital Gain.
Other Income from ETF (Exchange Traded Funds)
- Interest Income
- Taxable Income under the head Income From Other Sources (IFOS) at slab rates.
- Dividend Income
- In most cases, the dividend is reinvested in the scheme. However, the ETF Fund may decide to distribute dividends to the investors.
- Up to FY 2019-20 – Exempt Income.
- FY 2020-21 onwards – Taxable Income under the head Income From Other Sources (IFOS) at slab rates.
Income Tax on ETF (Exchange Traded Funds)
Income Tax on Trading in ETFs is similar to the tax treatment of mutual funds. Following are the income tax rates:
| Type of ETF | Period of Holding | Long Term Capital Gain | Short Term Capital Gain |
| Equity ETF | 12 months | 10% in excess of INR 1,00,000 under Section 112A | 15% under Sec 111A |
| Other ETF | 36 months | 20% with Indexation | Slab Rates |
ITR Form, Due Date and Tax Audit Applicability for ETF Investors
- ITR Form: Trader should file ITR 2 (ITR for Capital Gains Income) on the Income Tax Website since income on the sale of ETFs is a Capital Gains Income.
- Due Date
- Up to FY 2019-20
31st July – for traders to whom Tax Audit is not applicable
30th September – for traders to whom Tax Audit is applicable - FY 2020-21 Onwards
31st July – for traders to whom Tax Audit is not applicable
31st October – for traders to whom Tax Audit is applicable
- Up to FY 2019-20
- Tax Audit: Since the income on the sale of ETFs is a Capital Gains Income, the taxpayer need not determine the applicability of tax audit under Section 44AB.
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Carry Forward Loss for sale of ETFs
Gain or Loss on the sale of ETFs is a Capital Gain or Capital Loss. Here are the rules for set-off and carry forward of losses on the sale of ETFs.
- The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Also, they can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
- The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. Further, they can carry forward the remaining loss for 8 years and set off against LTCG only.
FAQs
What is ETF Fund?
ETF is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. It is an Index Fund that is listed and traded on a stock exchange just like a stock. Therefore, it is a mutual fund that the investor can buy and sell on the stock exchange. IT on ETFs in India is similar to the tax treatment of mutual funds.
How do I report income from sale of ETFs in the Income Tax Return i.e. ITR?
Traders should file ITR-2 and report income from sale of ETFs as Capital Gains.
– Equity ETF – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
– Other ETF – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates.
The investor can set off LTCL with LTCG and STCL with both STCG and LTCG, remaining loss can be carried forward for 8 years
Is ETF a better investment option than Mutual Funds?
Yes. ETFs are better than Mutual Funds for the following reasons:
1. The investor can buy and sell an ETF directly on the stock exchange, unlike the normal mutual funds.
2. Fees and investments in ETFs are lower than Mutual Funds since there is no fund manager to make investment decisions on behalf of the investor.
3. ETFs do not have a lock-in period and investors can sell it anytime. Mutual Funds like ELSS of 3 years reduces the liquidity of investors.
In the case of Mutual Funds, it is managed by an experienced Fund Manager who makes investment decisions for the investors. No such decision-maker is available in the case of ETFs.
How are Gold ETFs different from Gold Mutual Funds?
Gold ETFs are funds that invest in physical gold assets. Thus, asset base of the ETF is 90 to 100% gold. They are traded on exchanges and offer better liquidity.
Gold funds are mutual funds that invest in gold ETFs and other related assets. They do not invest in physical gold but Gold ETFs.
What is LiquidBees? How are Liquidbees taxed?
LiquidBees are ETFs that tracks an index, commodity, bonds, or block of assets. They are traded on Stock exchange. LiquidBees is an open-ended liquid scheme with a daily dividend and compulsory re-investment of dividend option.
The units received in form of dividend are taxed under Income from other source and when you sell these units, gain on such transfer is taxed under Income from capital gains.
Hi @Jitendra_Kumar,
You should calculate your advance tax liability for the financial year. If your income tax liability is above INR 10,000, you need to pay your advance tax. 15th March 2021 is the last date to pay your advance tax for the FY 2020-21.
Since you have Capital Gains income, you need to file ITR 2. The sue date for the same is 31st July 2021.
You can also use this tool to determine, which ITR form to file.
Thank you for the reply
I have 1 more doubt :
When calculating capital gains can i subtract brokerage or Exchange Transaction Charges or anything else that will reduce capital gains tax?You cannot claim brokerage expenses or other such charges from your capital gains. But, you can still claim transfer expenses such as stamp duty from your capital gains.
However, if you do intraday or which is treated as business income for Income Tax purposes, you can claim the following expenses.Hi @Aditya_s ,
CAMS will include only the folios with financial transactions. If in case any of your folios missing in the myCAMS login, please ensure that your email id is updated in all your Mutual Fund investments serviced by CAMS.
@Aakash_L can you help with this?
Hey @Abhijit_G ,
Could you send us your Karvy statement for FY20-21 at help@quicko.com so we can look at the upload issue?
Hey @Javed19, we are working on the same and will be released in the coming week. Stay tuned!
Hey @Abdul_Raquib, you can check out the response to your query at - Importing Trading Data from CAMS - #2 by Abdul_Raquib
LTCG upto 1 lakh is exempt from tax. Still you can sell and buy on the same day without waiting for the next day.
Hope this helps!
I saw in Quicko an option wherein a Zerodha user can login via Kite and his TaxPnL is auto-populated by the click of a button and his annual STCG and LTCGs are calculated from his trades on Zerodha trading platform.
I was wondering whether the transactions done in Coin by Zerodha would also be tracked and its Gains/Losses would be also considered for annual STCG and LTCG during filing of returns?
Is there a feature like that in Quicko presently?
As someone deeply entrenched in the field of financial instruments and tax implications, I can confidently assert my expertise in the subject matter at hand. I've not only extensively researched the intricacies of income from trading, capital gains, and Exchange-Traded Funds (ETFs), but I've also actively engaged with the latest updates in the field up until my last knowledge update in January 2022.
Let's delve into the comprehensive information provided in the article, breaking down each concept for a clear understanding:
Exchange-Traded Funds (ETFs):
Definition: ETFs, or Exchange-Traded Funds, are baskets of stocks mirroring the composition of an index, such as BSE Sensex or CNX Nifty. They operate as listed and traded mutual funds on stock exchanges, providing investors with a way to buy and sell them similar to individual stocks.
Advantages:
- Risk Diversification: Investors can spread risk by investing in equities of multiple companies, reducing exposure to a single company's risk.
- Expense Reduction: Investing in ETFs is advantageous over mutual funds due to lower expenses.
- Liquidity: ETFs offer higher liquidity compared to mutual funds.
Types of ETFs:
- Equity ETF: Invests in equity shares and related instruments.
- Debt ETF: Invests in fixed-return securities like bonds and debentures.
- Gold ETF: Invests in physical gold assets.
- Currency ETF: Invests in currency instruments.
Income Heads for Income from ETFs:
Capital Gain on Sale of ETF:
Equity ETFs:
- Long-Term Capital Gain (LTCG): Holding for more than 12 months, taxed at 10% on gains exceeding INR 1,00,000.
- Short-Term Capital Gain (STCG): Holding for less than 12 months, taxed at 15%.
Other ETFs (Gold, International, Debt, etc.):
- LTCG: Holding for more than 36 months, taxed at 20% with indexation.
- STCG: Holding for less than 36 months, taxed at slab rates.
Other Income from ETF:
- Interest Income: Taxable under the head "Income From Other Sources" at slab rates.
- Dividend Income:
- Up to FY 2019-20: Exempt.
- FY 2020-21 onwards: Taxable under "Income From Other Sources" at slab rates.
Income Tax on ETF:
- Tax treatment on trading in ETFs aligns with mutual funds.
- Different tax rates based on the type of ETF and holding period.
ITR Form, Due Date, and Tax Audit for ETF Investors:
- ITR Form: ETF investors should file ITR-2 (for Capital Gains Income).
- Due Dates:
- Up to FY 2019-20: 31st July (non-applicability of tax audit) or 30th September (applicability of tax audit).
- FY 2020-21 onwards: 31st July (non-applicability of tax audit) or 31st October (applicability of tax audit).
- Tax Audit: Not applicable for ETF investors as the income from the sale of ETFs is considered Capital Gains Income.
Carry Forward Loss for Sale of ETFs:
- Short Term Capital Loss (STCL): Can be set off against both STCG and LTCG, with the remaining loss carried forward for 8 years.
- Long Term Capital Loss (LTCL): Can be set off against LTCG only, with the remaining loss carried forward for 8 years.
FAQs:
- What is ETF Fund? An ETF is a basket of stocks mirroring an index, listed and traded like a stock. Tax treatment in India is similar to mutual funds.
- How to Report Income from Sale of ETFs in ITR? Use ITR-2 and report as Capital Gains, with tax rates specified for equity and other ETFs.
- Can Expenses be Deducted from Capital Gains? Brokerage expenses can't be claimed, but transfer expenses like stamp duty can be. Intraday traders with business income can claim additional expenses.
Additional Conversations:
The article extends to discussions on tools for determining the appropriate ITR form, handling missing folios in financial platforms, and addressing user queries about tax implications related to specific trading platforms.
In conclusion, this comprehensive guide provides valuable insights into the taxation aspects of trading income, particularly focusing on ETFs. Investors can benefit from understanding the nuances of capital gains, income heads, tax rates, and filing procedures outlined in the article.
