Liquid ETFs and Liquid BeES may distribute income to you in the form of dividend units instead of cash payouts. These allotted units are taxable and must be reported when you file your income tax returns.
Taxation of dividend income
The value of the dividend units allotted to you is treated as dividend income and is taxable under the head Income from Other Sources at your applicable income tax slab rate. If the aggregate dividend paid by a fund house exceeds the prescribed threshold during the financial year, Tax Deducted at Source (TDS) may be deducted before the dividend units are credited to your account.
Cost of acquisition of dividend units
Since the dividend is taxed when the units are allotted, the value of the dividend units on the date of allotment is treated as their cost of acquisition. When you sell these dividend units in the future, capital gains are computed as:
Capital Gains = Sale Value - Cost of Acquisition (the value considered as dividend income at the time of allotment)
This ensures that the same amount is not taxed twice.
Capital gains taxation on sale of dividend units
The capital gains tax depends on when the original units were acquired:
- Units acquired on or after 1 April 2023: Liquid ETFs and Liquid BeES are classified as specified mutual funds under Section 50AA of the Income-tax Act. Accordingly, any gains arising on the sale of these dividend units are deemed to be short-term capital gains (STCG), irrespective of your holding period, and are taxed at your applicable income tax slab rate.
-
Units acquired before 1 April 2023: The tax treatment is governed by the transitional provisions applicable to
specified mutual funds.
Depending on the date of transfer and the applicable tax laws for that period, different capital gains provisions may apply.
Example scenario
Suppose you receive dividend units worth ₹10,000:
1. The ₹10,000 is taxed as dividend income in the financial year the units are allotted to you.
2. The ₹10,000 becomes the cost of acquisition for these dividend units.
3. If you later sell these units for ₹11,500, the capital gain is ₹1,500.
| Particulars | Amount |
| Dividend value allotted (taxed as dividend income) | ₹10,000 |
| Cost of acquisition of these units | ₹10,000 |
| Future sale value of the units | ₹11,500 |
| Taxable capital gains (₹11,500 − ₹10,000) | ₹1,500 |
The tax on this ₹1,500 gain will be determined based on when the units were acquired, as explained above. This ensures that only the appreciation in value after the dividend is received is taxed as capital gains.
To help you file your taxes easily, Liquid ETFs and Liquid BeES are classified separately under the Debt ETF section in the Tax P&L report on Console.
