Gold Investment articles

Income Tax on Gold – Tax on different forms of gold investment

5 Mins read
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Gold is one of the most trusted investment commodity to invest and trade in. On a global scale, people have been buying and selling gold to make money for an extended period. With over 3000 years of history, the gold price has a high track record for giving profits to the investors and traders. It is true that every market has its downfall every once in a while, but Gold has always maintained its value. As a result, people started investing in gold coins, bars and jewellery. With the fast pace of digitization and increase in financial literacy, digital gold is now available for everyone. But before investing, let us understand the income tax which is levied on different forms of gold.

Gold ETF

ETFs are a form of stock investments that include assets such as commodities, bonds or stocks. Each unit of Gold ETF usually represents 1 gm of gold. Fund houses maintain these ETFs, all the fund collected is traded by the fund managers of the respective fund houses. The money received from the investors is used to purchase gold in various different forms like physical gold, bonds etc. ETFs can be bought and sold in the stock exchanges just like normal equities. You can purchase and sell Gold ETFs through NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). In India GoldBees is a very famous Gold ETF.

How are Gold ETF profits taxed?

Gold ETFs are priced according to the current market rate of the yellow metal. One significant benefit is that gold ETFs do not include any Wealth tax, Security Transaction tax, VAT or Sales tax.

You also do not have to pay any making charges or insurance amounts, like in the case of buying ornaments or any other forms of physical gold. All it takes to buy a gold ETF is the brokerage. However, these days a lot of discount brokers have made it easy to buy and hold ETFs by removing the brokerage charges.

Understanding the tax

If you own the gold ETF for a period of less than three years, then it will be categorised as short term investments, the profits will be taxed according to your total income tax slab rates for that particular financial year. Both the income and the profits from ETF will be added to determine the slab for ITR. However, if you own the gold ETF for more than three years in that case,it will be said and categorised as a long term investment, and in such a case the profits will be taxable at 20% along with indexation benefits. 

Gold Funds

These are a type of funds that either invest in gold reserves. Investment is planned on physical gold, gold mining companies, or gold producing and distributing organisations. Gold mutual funds are open-ended funds that invest in Gold ETFs and depend on the yellow metal’s current market price. With the help of professional fund management services, you can easily manage your portfolio and enjoy benefits like that of physical gold. Investing 10-20% of your portfolio in gold can help you protect against fluctuating markets and act as a cushion in tough times. 

If the gold mutual fund is held for a long-term duration (8 years or more), the current market price of gold is considered for tax returns calculations. Therefore, it can be beneficial if the price has steeply increased during those years.

How are Gold funds taxed?

Revenues earned from gold mutual funds for a short-term duration (less than three years) are added to gross income and taxed according to the income tax slab rate. If longer than three years, there is a 20% tax with indexation norms. For other applicable taxes, you might also have to pay Cess. 

Sovereign gold bond

SGBs are government securities for Gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. You get 2.5% interest and they have a lock in period of 8 years. 

How are SBG’s taxed?

When you hold SGB’s till maturity i.e. 8 years you need not pay any capital gain tax. If you redeem your gold before maturity but after 5 years then you need to pay 20% tax. If you sell SGB before 1 year then you will be taxed according to your tax slab and after 1 year you will have to pay 10% tax.

Digital Gold

One of the latest ways to invest in gold, digital gold, can be purchased via mobile wallets for lesser amounts. The portion of gold for that money is kept insured in a safe space and is of 99.9% purity. Digital Gold can be purchased based on its weight or the amount. You can also get the physical gold or cash in exchange whenever wanted. Digital gold has highest liquidity among all forms of gold.

How is digital gold taxed?

Digital gold is not taxable for short term capital gains. Short Term Capital Gains are when holding period is less than three years. In the case of long term investment or a holding period of more than three years, you are liable to pay 20% tax on the profits. While buying any digital gold you pay 3% GST and while selling there is no GST to be paid.

Physical Gold

Jewellery, gold coins, bars or biscuits are the traditional way of purchasing gold. It is usually done for consumption purposes and given more importance in our society. Physical gold does not require the intervention of any fund managing company or third party. You can visit the bank or a jeweller store to purchase it. With physical gold, there are several risks attached. You always need to store it in a bank locker or a safe space and get it insured. You should always get a purity certificate and receipt. Also, note that the resale value of gold tends to be lesser than other forms of investment.

How is physical gold taxed?

Like other forms, profits gained from physical gold that has had the owner for less than three years will be added to the yearly salary and charged according to the income tax slab rate. For more than three years, there has been a 20% tax on profits. You also pay 3% GST while buying physical gold. Physical Gold costs you more money because of its extra making, maintenance and security charges. If the amount crosses 30 Lakhs, wealth tax is also levied.

Common Differences 

ParametersPhysical GoldDigital Gold
PurityMight be less than 99.5%Standard 99.9 purity
PricePrice may varyPrices remain the same across the country.
LiquidityLess liquid. Physical gold can only be sold to a jeweller.Can sell anytime in exchange for cash. 
Extra charges20-30% making charges includedNo making charges

Conclusion

Like any other form of investment, profits gained from sale of gold are taxable under the Indian Income tax laws. Best investments are those which give profits that surpass taxes. Gold is one such investment type. Gold has been a safe form of investment for centuries. As more and more people are getting financially empowered and investing their hard-earned money in various investment forms, gold is one of the most trustable and safe choices. Gold always offers portfolio stabilisation when the stock market is fluctuating.  

Frequently Asked Questions

Question 1: Are Gold ETFs a safe form of investment?

Answer 1: Using your Demat account, you can easily buy or sell gold ETF shares. Gold ETFs are a hedge against inflation and stock market uncertainty. They are less likely to give you huge profits and also protect your portfolio in politically or economically stressed times. 

Question 2 – What are some of the standard gold mutual funds available in India?

Answer 2: Some standard gold mutual funds you can invest in are SBI Gold Fund, Axis Gold Fund, Invesco India Gold Fund, Nippon India Gold Savings Fund, HDFC Gold Fund, Kotak Gold Fund etc. 

Question 3: How are sovereign gold bonds taxed?

Answer 3 – Sovereign Gold Bonds helps you earn about 2.5% interest annually. These profits are classified under the income from other sources and are taxed based on the applicable slab rate. If you have owned SGB for more than eight years, all profits are entirely tax-free. 

Question 4 – How is Gold received as a gift taxed?

Answer 4 – Gold as a gift is not taxed if obtained from a blood relative like a parent, sibling or child. But if the assistance is obtained from a non-relative and costs more than Rs 50,000, you will have to pay tax under the head of ‘income from other sources.’

Question 5 – Is there a direct tax on short term capital gains of digital gold?

Answer 5 – No. If you sell digital gold within 3 years of holding then profits earned on it are not taxable.

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