Short answer

Dividends from Liquid ETFs and Liquid BeES are taxed according to your income tax slab rate. When these dividend units are eventually sold, the dividend value is treated as the cost of acquisition, and any gains from the sale are taxed under capital gains.

Capital gains taxation on dividend units

Short-term capital gains (STCG): STCG applies if the units are sold within 3 years and are taxed at your slab rates.

Long-term capital gains (LTCG): LTCG applies if the units are held for over 3 years and are taxed at 12.5% (with the first ₹1,25,000 of gains exempt from tax in a financial year).

Example scenario

Purchase: 1,000 units of Liquid BeES were purchased at ₹1,000 per unit.

Dividend: You receive a dividend of 35 units during the financial year.

Tax on dividends

These 35 units are taxed based on their market value at ₹1,000 per unit

The total taxable value is ₹35,000 (35 units × ₹1,000)

The tax rate applied will be your income tax slab rate

When you sell dividend units (STCG and LTCG)

If you purchased before April 1, 2023:

Short-term capital gains (STCG): If the units are sold within 3 years, the gains are considered short-term and taxed at your slab rate

Long-term capital gains (LTCG): If the units are held for over 3 years, they are treated as long-term and taxed at 12.5% with indexation

If you purchased after April 1, 2023:

Things to keep in mind

If the dividends cross ₹5,000, an additional TDS of 10% is applicable.

Contact a chartered accountant for assistance with tax filing.