Exchange Traded Funds (ETFs) are extremely popular instruments abroad. In India they are more or less restricted to gold, though we have a few that track the index.
Gold ETFs Tax
First, you have to determine whether the ETF is short term or long term. If the holding period is more than three years it is considered as long term if you have sold after that period. Gold Exchange Traded Funds attract short term capital gains as per the income tax slab.
On the other hand in the case of long term capital gains on Gold ETFs they attract a 10 per cent tax with indexation or 20 per cent with indexation.
On the other hand there is no Securities Transaction Tax (STT) that is currently applicable on Gold ETFs.
Index ETFs Tax
As mentioned earlier Index Exchange Traded Funds track the index. So, if there is a Nifty ETF it would track the movement of the Nifty.
Tax on index ETFs is very much different when compared to the taxation on gold ETFs. The short term capital gains on these instruments is at 15 per cent, while there is no capital gains tax in the long term. Currently, there is a Securities Transaction Tax of 0.125 per cent.
Risks Associated With Exchange Traded Funds
These instruments carry a certain level of risk. For example, if gold prices fall, there would be a fall in the price of Gold ETFs for sure. On the other hand in the case of index ETFs it depends on the index that it is tracking.
These days its almost impossible to escape taxes and there are very few instruments in India where you need not pay tax. Perhaps the only one where you may not end-up paying tax on interest is ULIPs and PPF.