Gold and overseas exchange-traded funds likely to get the tax edge

While gold, silver, and international exchange-traded funds (ETFs) will qualify for the 12.5 per cent LTCG taxation in 12 months as they are listed on exchanges

The change in taxation on investment products, as announced in the Budget, has seemingly given an edge to commodity and international exchange-traded funds (ETFs).

According to the new rules, the minimum holding period to qualify for long-term capital gains (LTCG) taxation is 12 months for assets listed on the stock exchanges. 

In the case of all other assets, it is 24 months.

As a result, the taxation on assets like gold, silver and international equities will differ based on the mode of investment.

Gold, silver and international ETFs will qualify for the 12.5 per cent LTCG taxation in 12 months as they are listed on exchanges. However, those investing in them through the physical or mutual fund route will have to wait for 24 months to get the LTCG benefit.

 

“The holding period of all listed assets will now be one year. Therefore, the holding period for listed units of business trusts (ReITs and InVITs) has been reduced from 36 months to 12 months. The holding period of gold and unlisted securities (other than unlisted shares) also reduced from 36 months to 24 months,” the income tax department said in FAQs on Wednesday.

According to senior mutual fund executives, prima facie the changes give an impression that ETFs will enjoy a preferential taxation in the case of commodities and international equities. But the industry is awaiting further clarity on it.

“A Nasdaq 100 ETF is long term after only one year (but the Nasdaq fund of funds is long term only after two years). All listed securities and bonds (except bond ETFs or listed debt funds) are long term after one year. Bond ETFs are forever short term,” Deepak Shenoy, chief executive officer (CEO) of Capitalmind said in a social media post.

Despite being listed on the exchanges, debt ETFs do not qualify for the LTCG taxation as they fall under the 'specified mutual fund' category.

Any MF product, including ETFs, which invest over 65 per cent of assets in bonds and money market instruments are taxed at the investor's slab rate, irrespective of the holding period.

While the holding period for LTCG taxation is currently a 'grey area', the short-term capital gains tax on commodity and international ETFs will be according to an investor's slab rate. It will not be the 20 per cent tax applicable on listed equities, said Niranjan Avasthi, senior vice-president and head, product, marketing and digital, at Edelweiss Asset Management.