Question: I am a salaried employee and have invested in foreign Exchange Traded Funds (ETFs). I understand there have been recent changes to the tax treatment of foreign ETFs. Could you kindly provide clarification on how these changes may impact the taxability of my investments?
Response given by CA (Dr.) Suresh Surana: In accordance with section 50AA of the Income Tax Act, any gain or income arising on transfer, redemption or maturity of units of such specified mutual funds (wherein not more than 35% of the total proceeds are invested in equity shares of domestic companies), acquired on or after 1 April 2023, will also be considered as short-term capital gains, and taxable at the applicable slab rate of the investor, irrespective of the period of holding. Further, indexation benefit would not be available in case of such short-term capital gain.
W.e.f. FY 2025-26, Specified Mutual Fund would mean a mutual fund that invests more than 65% of its total proceeds in debt and money market instruments or a fund that invests 65% or more of its total proceeds in units of such aforementioned fund. Units of foreign ETFs disposed off or sold after 24 months from the date of its acquisition will lead to long term capital gains, otherwise the same would be categorized as short term in nature.
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Long-term and short-term capital gains on such units are leviable to 12.5% tax without indexation u/s 112 of the IT Act and as per the investor’s applicable slab rate, respectively. The rate of 12.5% without indexation has been made applicable w.e.f. 23rd July 2024. Prior to 23rd July 2024, the rate of 20% with indexation was applicable.
A brief summary of the applicable Tax rates in case of Foreign ETFs would be as follows:
ParticularsHolding PeriodLTCGSTCGTaxation of Foreign ETFsInvestments before 1st April 2023
Redemption from 1st April 2024 to 22nd July 202436 months20% with IndexationApplicable Slab RateRedemption on or after 23rd July 202424 months12.5% without IndexationApplicable Slab Rate
Investments on or after 1st April 2023
Redemption from 1st April 2024 and 31st March 2025NAApplicable Slab RateRedemption on or after 1st April 202524 months12.5% without IndexationApplicable Slab Rate
Disclaimer: The views and facts shared above are those of the expert.
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