An official announcement regarding ETFs was made in the Union Budget 2019-20 by Finance Minister Nirmala Sitharaman. She said, “ETFs have proved to be an important investment opportunity for retail investors and has turned out to be a good instrument for Government of India’s divestment programme. To expand this further, the Government will offer an investment option in ETFs on the lines of Equity Linked Savings Scheme (ELSS). This would also encourage long term investment in CPSEs.”
This move would stimulate retail investing in ETFs which will help in growth of the economy and help the Government achieve its disinvestment target for the current fiscal year.
ETFs function like passively managed mutual funds where the fund invests in diversified securities. ETFs like CPSE and Bharat-22 are traded on stock exchanges just like equity stocks of companies.
A proposal in this regard was sent to the Central Board of Direct Taxes (CBDT) by Department of Investment and Public Asset Management (DIPAM) seeking their opinion on extending ELSS like Income Tax Benefits to CPSE and Bharat-22 ETFs.
Currently, investments upto ₹1.5 lakh in Equity Linked Savings Scheme (ELSS) mutual funds are eligible for tax deductions under Section 80(C) of the Income Tax Act.
If the original proposal has been approved in its entirety, retail investors will enjoy tax benefits like ELSS, however, there will be a lock-in period of 3 years in these equity securities. Although it is not mandatory to avail the tax benefits and stay invested for 3 years, investors can choose to trade in their units as per their wishes.
A proper plan and clarification on slabs for tax benefit on investment in ETFs can be expected in a few days.