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.
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.
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. |
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.
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%. |
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. |
Gold derivatives are contracts in which gold is the underlying asset traded in the commodities market. The tax treatment for trading these derivatives is similar to that of commodity futures and options (F&O) trading. The income from trading in gold derivatives is classified as Non-Speculative Business Income. Taxpayers can deduct related expenses to calculate taxable profit or loss by preparing a Profit and Loss account. This type of income is taxed according to the applicable income tax slab rates.
In India, gold is often inherited or gifted to loved ones on special occasions. As per Section 56(2) of the Income Tax Act, gold received as a gift or inheritance from a relative (spouse, children, parents) is exempt from tax. However, if you receive gold valued over Rs. 50,000 from someone other than a relative, it is taxable as income from other sources.
Gold received as a gift on the occasion of marriage is also tax-exempt. When a taxpayer sells gold that was received as a gift or inheritance, the proceeds are considered income from capital gains and are taxed accordingly.
The sender or person gifting the gold does not have any tax obligations related to the transfer, whether they are giving it to a relative or someone else.
Non-resident Indians (NRIs) can invest in physical gold, digital gold, and paper gold, but they cannot invest in Sovereign Gold Bonds due to RBI and FEMA regulations. The tax rates for these investments are the same as those for Indian residents. However, Tax Deducted at Source (TDS) applies to redemptions of Gold Exchange-Traded Funds (ETFs) or mutual funds.
The TDS rate is 30% for short-term returns, which are gains from investments held for less than 36 months. For long-term returns from investments held for more than 36 months, the TDS rate is 20%. This ensures that NRIs are subject to similar tax treatments as Indian residents when investing in gold through ETFs or mutual funds.
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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According to Indian Income Tax regulations, an unmarried woman can have 250 grams of gold, an unmarried man can have up to 100 grams, and a married woman can have up to 500 grams of gold.
As per the Central Board of Direct Taxes (CBDT), there are specific limits on the amount of gold jewellery that can be kept at home without needing to provide proof for tax purposes. These limits are:
Married female: 500 grams
Unmarried female: 250 grams
Married male: 100 grams
Unmarried male: 100 grams
If you buy gold worth over Rs. 2 lakhs through cash or otherwise, you must provide identity proof, like a PAN or Aadhaar Card. Gold purchases up to ₹2 lakhs do not require furnishing PAN or Aadhaar.
Gold received as a gift exceeding Rs. 50,000 in a year is taxable under 'Income from other sources' at slab rates based on your income bracket. This includes gold jewellery, bullion, ETFs, and MFs.
The cheapest way to buy gold is through Sovereign Gold Bonds (SGBs). Issued by the Government of India, they offer interest and eliminate storage costs, providing a cost-effective investment compared to physical gold.