Indians have traditionally been one of the biggest investors in gold. With emergence of other non-physical options such as digital gold, ETF, gold fund and sovereign gold bond, the reach of the gold investment has deepened in India. With increase in the formal investment options, the accountability of paying income tax has also increased. Citizens are required to pay income tax on the gains made on their gold investments under various categories. As the returns on the yellow metal have been quite rewarding, many investors who have made gains will be required to pay taxes. We tell you how the income tax is levied on various forms of gold investments.
Tax on physical gold
Physical gold in the form of jewellery is a common possession in most of the Indian households. When it comes to income tax computation of physical gold it is done on the basis of gains made in the investment during the holding period. Based on the period of investment these gains are divided between two categories. If you sell the gold before three years of purchase, the gains will be computed as short-term capital gains (STCG). However, if you sell it after three years, it will be called long term capital gains (LTCG).
The taxation on these two gains are completely different in nature. "STCG at slab rates will be taxed if sold within 36 months or LTCG will be taxed at 20 per cent after indexation, if sold after 36 months," says Vivek Jalan - Partner at Tax Connect Advisory Services.
STCG at the slab rate means that any short-term gains that you make by selling your gold investment before three years will be added to your annual income and as a result you will have to pay tax effectively on the highest income tax slab under which your income falls.
When it comes to long-term capital gains when you sell it after three years, you have to calculate taxes with indexation. Indexation is a process by which the acquisition cost is adjusted with the inflation by inflating it by rate of inflation during the holding period. As the cost increases, the gain reduces and hence the resultant tax outflow also comes down.
Tax on gold ETF, gold fund and digital gold
The new age options like gold ETF, gold mutual fund and digital gold allow you to get the benefit of gold investment without actually buying the physical gold. As investors make gains in these investments, they become liable to pay income tax on their gains.
"The tax treatment of gold mutual funds, digital gold and gold ETFs at the time of redemption is the same as selling gold or jewellery, where the classification of capital gains will be dependent on the holding period," says Jalan of Tax Connect Advisory Services. "LTCG and STCG taxes are to be paid depending on the period of holding in case of physical gold, gold mutual funds, gold ETF or digital gold," he adds.
Tax on sovereign gold bond
In order to meet the gold investment appetite of Indians and at the same time discouraging them to hold physical gold, the government offers the sovereign gold bond options to investors. The bonds can be purchased both in the primary market where they are frequently opened for new subscription and also in the secondary market after that.
"The primary market is where you can bid for newly issued tranches of SGB. The secondary market is basically NSE and BSE where the SGBs issued in the primary market are listed for trading. Whoever has bought SGBs during the issue can sell those if they so want. People who missed out the issue can buy it from sellers, just like you buy stocks," says Archit Gupta, Founder and CEO, ClearTax.
However, when it comes to calculating income tax it is not similar to other options. "In case of sovereign gold bonds, it is a little different as these bonds earn interest in the interim invested period also," says Jalan of Tax Connect Advisory Services. The interest that an SGB bond holder earns each financial year is completely taxable and is added to the income and the holder has to pay taxes as per income tax slab.
Now, when it comes to capital gain, the taxation depends on nature of holding of the SGB. The RBI FAQ says: "The capital gains tax arising on redemption of SGB to an individual has been exempted." It means whether you are an initial subscriber or purchaser from the secondary market, if you have held the bond till its maturity and redeemed it after maturity then you enjoy the income tax exemption and need not pay any tax on the capital gains.
However, if you transfer or sell your SGB holding before maturity then your gains are no longer exempted. "If capital gains arise in case of exit or transfer during the interim period, it will be taxed as STCG at slab rates if sold within 36 months. Else, it will be taxed at 20 per cent after indexation, if sold after 36 months," says Jalan of Tax Connect Advisory Services.