Passive Halal Investing in India Through Shariah Index ETFs

What a Shariah index ETF does

An exchange-traded fund replicates an index by holding its constituents in the same weights. A Shariah index ETF tracks an index from which non-compliant companies have been removed, so the fund inherits the screening work of the index provider.

Inside the Nifty50 Shariah index

NSE Indices builds the Nifty50 Shariah index from Nifty 50 constituents that pass business and financial screens. Banks, non-bank lenders, insurers, tobacco and alcohol firms drop out, leaving a concentrated portfolio dominated by information technology, consumer and industrial companies.

Other Shariah indices

NSE also calculates a Nifty500 Shariah index, tracked by the UTI Nifty 500 Shariah Index Fund, and BSE publishes the BSE 500 Shariah index used by Taurus Ethical Fund. Index funds are bought at NAV from the fund house, not on the exchange.

Taxation of listed equity ETFs

Equity ETFs are taxed like listed shares. Gains on units held more than twelve months are taxed at 12.5% above ₹1.25 lakh annually, short-term gains at 20%, and securities transaction tax applies on sale through the exchange.

Which Shariah ETFs can be bought in India?

Nippon India ETF Nifty 50 Shariah BeES, launched in March 2009 as a Benchmark Asset Management product and now managed by Nippon Life India Asset Management, is the only dedicated Shariah equity ETF in India. It trades on the NSE under the symbol SHARIABEES and is benchmarked to the Nifty50 Shariah TRI.

Liquidity and tracking concerns

The fund is small compared with mainstream Nifty 50 ETFs, so daily traded volumes can be thin and the market price may deviate from net asset value. Placing limit orders and checking the indicative NAV before trading reduces this risk.

Regulatory framework

ETFs are mutual fund schemes governed by the SEBI (Mutual Funds) Regulations, 1996 and traded through stockbrokers registered with SEBI. Market makers appointed by the fund house support liquidity, and units are held in demat form with NSDL or CDSL depositories.

Alternatives when liquidity is too low

Investors wanting larger positions can use the UTI Nifty 500 Shariah Index Fund or active funds such as Tata Ethical Fund, bought at NAV from the fund house. Residents may also buy foreign halal ETFs under the Liberalised Remittance Scheme.

Concentration in a few stocks

Because banks and financial companies are removed from the Nifty 50, the Shariah version holds fewer companies, and a handful of large IT and consumer names carry heavy weights. Investors should treat it as a concentrated large-cap holding.

Market makers and indicative NAV

Fund houses appoint market makers to quote buy and sell prices for ETFs, and exchanges display an indicative NAV during trading hours. Comparing the two before ordering shows whether the price is fair or carries a premium.

ETF or index fund?

An index fund is bought directly from the fund house at the end-of-day NAV and supports SIPs without a demat account. An ETF trades during the day on the exchange and may be cheaper, but it needs a demat account and enough liquidity.

Adding gold ETFs for balance

Gold ETFs backed by physical gold are widely used by halal investors to diversify equity risk, and TASIS refers to Shariah-compliant gold and silver ETFs. Silver ETFs also exist, but their volatility is higher than that of gold.

Nomination and demat records

Demat accounts allow nominees to be registered, and SEBI rules require investors to nominate or opt out. Muslim investors should note that a nominee may receive the units, while inheritance shares still follow personal law.

Buying Shariah BeES: a step-by-step guide

1. Open a demat and trading account with a SEBI-registered broker after KYC with PAN and Aadhaar.
2. Search for the NSE symbol SHARIABEES and confirm the scheme name.
3. Compare the market price with the indicative NAV published by the fund house.
4. Place a limit order rather than a market order to avoid paying a large premium.
5. Avoid margin trading facilities, which charge interest.
6. Record dividends, if any, for purification and keep contract notes for tax.
7. Review holdings yearly and rebalance with other halal assets such as gold.

Costs and documents

Common errors with Shariah ETFs

• Using market orders in a thinly traded ETF and paying well above NAV.
• Holding units through a margin trading facility that charges interest.
• Expecting the ETF to mirror the Nifty 50; sector weights differ sharply.
• Forgetting purification of any distributions.
• Ignoring the Liberalised Remittance Scheme limits and tax collected at source when investing abroad.

Do Shariah ETFs pay dividends?

An ETF may reinvest dividends from its holdings or distribute them, depending on the scheme’s policy. Any distribution received is taxed at the investor’s slab rate and may need purification for the share of interest earned by underlying companies.

Is the Nifty50 Shariah index certified?

NSE Indices states that current Nifty 50 constituents are screened for Shariah compliance and publishes the criteria in a methodology document and factsheet. Investors wanting assurance should read those documents and the ETF’s scheme information document before investing.

Can NRIs buy Shariah BeES?

NRIs can buy listed ETFs through a portfolio investment scheme account linked to an NRE or NRO bank account, subject to broker policies. Residents of some countries, including the United States, may face restrictions because of FATCA rules.

Can Indians invest in global Shariah ETFs?

Under the Liberalised Remittance Scheme, resident individuals may remit up to USD 250,000 a year abroad, including to buy foreign halal ETFs through overseas brokers. Tax collected at source applies above specified thresholds and foreign assets must be reported in the income tax return.