Capital gains can be long-term or short-term, and the tax implications for these differs accordingly and is also conditional on the type of ETF.

For Equity ETFs

The tax implication for Equity ETFs would be very similar to the capital gains made from individual stocks. Capital gains are considered short-term capital gains if the income arises from the sale of stocks that were on hold for less than a year. Likewise, capital gains are considered long-term capital gains when the holding period is greater than 1 year.

As per section 112A of the Income Tax Act, for all long-term capital gains, an amount of up to INR 1 lakh is tax-deductible, and a tax of 10% would be levied on any amount greater than 1 lakh without indexation benefits.

As per section 111A of the Income Tax Act, short-term capital gains are taxed at 15%, along with surcharge and other cesses as applicable.

For Gold, Debt and Other ETFs

Post the amendment in the Finance Bill on April 01, 2023, assessing tax liability for gold, debt and international ETFs based on their holding period has become irrelevant since they are now classified as short-term capital assets and, hence, taxed at the existing income tax slab rates.

Exchange Traded Funds (ETFs) are essentially mutual fund schemes or index funds that are listed and traded on an exchange just like stocks. ETFs can be bought and sold throughout the trading day. Buying/Selling of ETFs is as simple as buying/selling of any other stock on the exchange allowing investors to take advantage of intra-day price movements. Thus with ETFs, one can benefit both from the flexibility of a stock as well as diversification of an open ended mutual fund scheme.

All ETFs mimic the composition of the index/sectors they track. This is a passive style of investing and hence carries low risk and low costs. Investors can buy shares of an ETF and even trade these through the day, on a stock exchange.

In India we have different types of ETFs- Equity, Debt, Gold/Silver, Global and Smart beta.

• Equity ETFs are passive investment instruments that are based on indices and invest in securities in same proportion as the underlying index
• Debt ETFs like equity ETFs, Debt ETFs offer exposure to a basket of securities that, in this case, is a basket of bonds and other debt products.
• Gold/Silver ETFs are instruments that are based on gold/silver prices and invest in gold/silver bullion. Because of its direct gold/silver pricing, there is a complete transparency on the holdings of an ETF.
• Global ETFs invests mainly in foreign based securities. These ETFs may track global markets or track a country-specific benchmark index.
• Smart Beta ETFs are comprised of a list of stocks that are selected based on criteria. The criteria is often a factor or a combination of factors like low volatility, value, quality or momentum. For example, a Nifty Smart Beta ETF with a focus on low volatility would comprise of stocks within the 50-stock index that are relatively less volatile than their peers.

Net asset value (NAV)

Like a mutual fund, an ETF also has an end of the day Net Asset Value (NAV).NAV tells you the total value of all the fund’s assets and yours. An ETF trades real-time, whereas NAVs are only announced at the end of the day. So how do you figure out if the price you are paying for an ETF is fair in real-time?
Check iNAV

Intraday or indicative net asset value (iNAV)

Given that ETFs trade real-time, you need a reference point to see if the market price you see on your trading platform is a fair one and the indicative or intraday NAV (iNAV) serves as that reference. AMCs usually calculate this every 10-15 seconds and publish it on their websites. This serves as a real-time NAV so that you can use this as a fair value reference to compare it with the current market price on the stock exchanges.

ETFs, like stocks, are bought as shares through a broker, every time an investor makes a purchase, he/she pays a brokerage commission. In addition, an investor can incur the usual costs of trading stocks, including differences in the ask-bid spread etc. Of course, traditional mutual fund investors are also subjected to the same trading costs indirectly, as the fund in turn pays for these costs.

ETF Baskets are research-backed portfolios of individual ETFs that provides exposure to different themes and sectors. This can help investors diversify across market-caps, asset classes and factors like volatility or momentum.

• Individuals (Residents/NRI)
• Corporates
• Institutions

• Market Risk: Just like all other investments in financial markets, ETFs are also subjected to market risk
• Tracking error: Generally, ETFs track a particular index or benchmark as its underlying. The returns generated by a ETF can be more or less than its underlying benchmark and this difference is measured as tracking error.