Taxes on Index Funds in India

Index funds have gained popularity rapidly in the last few years. 

As per Moneycontrol, index funds (equity and debt combined) received net inflows of more than ₹95,000 crores in FY23. Unique offerings like Bharat Bond ETF and index funds contributed significantly.

Many DIY (do-it-yourself) investors prefer investing in index funds because they offer a simple way to wealth creation. The affordability (low expense ratio) is another attractive feature of index funds.

In this article, we discuss what index funds are and how they are taxed.

Understanding Index Funds

Index funds help you invest in the market passively. 

This means that index funds don’t engage in picking stocks and bonds but simply invest in an equity index like the NIFTY 50 or a debt index like a G-sec index. The objective of index funds is to generate the same return that the index generates.

This is in contrast with actively managed funds which engage in active stock picking and try to beat the returns generated by an index for their investors.

Here are some examples of index funds:

TypeFund NameIndex TrackedAUM (July 2023)
EquityUTI Nifty 50 Index FundNIFTY 50₹11,586 cr
EquityHDFC Index S&P BSE Sensex FundSENSEX₹5,071 cr
DebtBHARAT Bond FOF - April 2030NIFTY Bharat Bond Index Series - Apri 2030₹6,668 cr
DebtHDFC NIFTY G-Sec Jun 2036 Index FundNIFTY G-sec Jun 2036 ₹570 cr

Note: The above list is for information purposes only. We don’t recommend investing in the schemes mentioned above.

Why do investors invest in index funds?

Index funds may seem to be favorable because many times, actively managed funds fail to beat or even severely underperform the index/benchmark. 

For example: As per the SPIVA report of Dec 2022, more than 90% of active large cap funds underperformed the large cap index S&P BSE 100 over 3 and 5 years.

The SPIVA or the S&P Indices Versus Active Funds report is released by the global S&P Global and compares the performance of actively managed funds with appropriate benchmarks.

Index/passive investors believe that trying to predict what mutual fund schemes will beat the index/benchmark is time-consuming and difficult/impossible. Hence, they choose to invest in index funds and earn benchmark returns with very low effort.

How are Index Funds Taxed?

The taxation of index funds in India depends on the dominant asset class of each index fund. The dominant asset class could be either equity or debt.

Taxation of Equity Index Funds:

Equity index funds are those where at least 65% of the total assets are invested in equity and equity-related instruments. 

The tax treatment of capital gains generated by equity index funds is:

TermShort term capital gainsLong term capital gains
ApplicabilityLess than 1 year holdingMore than 1 year holding
ExemptionNil₹1 lakh
Tax rate15%10%
IndexationNot applicableNot applicable

Debt Index Funds:

Debt index funds are those where more than 65% of total assets are invested in debt instruments or bonds. 

There has been a recent development (Finance Bill, 2023) in the tax treatment of debt funds. As per the bill, investments made in debt index funds after 1 April 2023, capital gains will be taxed at your marginal income tax rate, irrespective of the holding period.

This means that capital gains arising from debt index funds will be added to your taxable income and taxed at your income tax slab rate, irrespective of the holding period.

However, investments made in debt index funds before 1 April 2023, enjoy LTCG and indexation benefits and taxed as follows:

TermShort term capital gainsLong term capital gains
ApplicabilityLess than 3 years holdingMore than 3 years holding
Tax rateMarginal income tax rate20%
IndexationNot applicableApplicable


Investing in index funds attracts taxation just like investing in other mutual funds does.

However, the taxation is least (10%) when you invest in equity index funds for more than a year. Further, the taxation of debt index funds is no more attractive as LTCG and indexation benefits have been taken away for investments made after 1 April 2023.

Index Fund Taxation FAQs

Is investing in index funds tax-free?

No, investing in index funds is not tax-free. Capital gains generated from index funds are taxable.

Do index funds come under 80C?

Few AMCs have launched ELSS (Equity Linked Savings Scheme) index funds in 2023, which offer tax benefits under section 80C.

Is the NIFTY index fund taxable?

Yes, index funds tracking the index like NIFTY 50 are equity mutual funds and taxed accordingly. For capital gains less than one year old, the STCG tax rate of 15% applies, whereas for capital gains more than one year old, the LTCG tax rate of 10% (after ₹1 lakh exemption) applies.