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Planning to invest in gold? Understand the income tax implications

By admin
17 February 2023
5 mins read

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Planning to invest in gold? Understand the income tax implications

Are you thinking of investing in gold and gold-related assets? Gold can be an excellent avenue to add to your portfolio, especially since gold provides a hedge against inflation. Today, your options are not limited to physical gold and jewellery - you can buy digital gold as well!

But, before you purchase gold, you should know the income tax implications that come with it. Not all gold-based instruments are taxed the same way. So, to help you make an informed decision, here are the taxes you need to pay on various forms of gold purchase.

Tax on various forms of gold purchases

Both digital and physical gold purchases are subject to taxation. However, they are treated as separate investment instruments. Thus, they are taxed differently. We will focus on the following gold investments in the next section:

1. Tax on the sale of physical gold like jewellery, coins, and bars.

2. Tax on the sale of digital gold like Sovereign Gold Bonds (SGB) and Gold ETFs.

Tax on the sale of physical gold

For ages, people have been buying gold in its physical form, mainly gold jewellery, bars, and coins.

Here is how buying and selling physical gold is taxed in India:

*Short-term Capital Gains Tax (STCG)*	Short-term capital gains are applicable if you sell your gold within three years of purchase. These gains are added to your next taxable income and taxed as per your tax slab.
*Long-term Capital Gains Tax (LTCG)*	If you sell your gold after three years of purchase, long-term capital gains tax is applicable. LTCG on gold gains is 20%, but it comes with the benefit of indexation. Simply put, indexation is used to adjust the purchase price of your investment to reflect the effect of inflation on it.
*GST on Exchange of Jewellery*	When you exchange gold jewellery, the transaction doesn’t attract any GST if you exchange the same quantity of gold. You only need to pay the making charges difference if any, and there are GST implications on it.

Tax on the sale of digital gold

Digital gold is becoming an increasingly popular investment choice because it comes with no making charges, and you don’t need to worry about storage and safekeeping. Instead, it is stored in insured vaults by the seller on your behalf.

The two most popular forms of digital gold are Sovereign Gold Bonds (SGBs) and old ETFs. If you are planning to invest in any of these instruments, here are the tax implications.

#1 Tax on the sale of Sovereign Gold Bonds

Sovereign Gold Bonds (SGB) is backed by the Government of India. What this means is that RBI issues Sovereign Gold Bonds on behalf of the government. Thus, they are considered a safe option.

The tax implications on the sale of SGB are as follows:

*Redemption of SGB on maturity*	Any gain on SGBs redeemed on maturity, is exempt from tax.
*Early redemption (after five years)*	Any gain on the sale of SGB after five years is considered a long-term capital gain. Similar to physical gold, a 20% LTCG tax is applicable after indexation.
*Sale of SGB through the stock exchange*	If you sell SGBs through a secondary market such as a stock exchange, both your STCGs and LTCGs are subject to taxation. So, if you sell the SGB within 36 months of purchase, you will have to pay taxes as per your tax slab. If you sell your SGBs through the stock exchange, your long-term capital gains will be taxed at 20%.

#2 Taxation on gold exchange-traded funds (Gold ETFs)

Gold exchange-traded funds, or gold ETFs, are a category of mutual funds. Investors pool in their money to purchase units of these mutual funds. Then, these mutual fund units are traded on stock exchanges. The price of gold ETF units (NAV) represents the value of the underlying physical gold.

Here is how taxation works for Gold ETFs:

*STCG (Short-term Capital Gains).*	If you sell your ETF units within three years of purchase, your earnings will be considered short-term capital gains. They will be added to your next taxable income and taxed according to your tax slab.
*LTCG (Long-term Capital Gains)*	If you redeem your gold ETF units after three years of purchase, they are considered long-term capital gains. They are taxed at 20%, along with the benefit of indexation.
*GST (Goods and Services Tax)*	GST is applicable to the expense ratio of the gold ETF. The maximum expense ratio for Gold ETFs in India is 1% and an 18% GST is charged on this expense ratio.
*TDS (Tax deducted at source)*	TDS is not applicable on Gold ETFs.

In conclusion

Now that you know about the income tax rules for gold purchases, you can start investing in the gold asset of your choice.

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