Gold Investment: Tax Treatment of Various Forms of Gold

There are various forms of gold where one can invest. It is the most attractive class of asset to the Indians. Besides physical gold, digital gold and paper gold are also in demand nowadays. The investor should know about the tax liabilities related to gold investment. 

Sale of Physical Gold attracts Capital Gains Tax.

Gold is considered a capital asset as per the Income Tax Act. When an individual sells gold in physical form such as gold jewellery, gold biscuits, gold coins, etc., capital gain tax shall be applicable. Capital gains are taxable based on the type of gain, whether long term capital gain or short term capital gain. If you are holding gold for more than 36 months before the date of sale, it is a long-term capital gain. Otherwise, it is a short-term capital gain, and tax will be payable accordingly. 

You can take indexation benefit on the cost of acquisition of physical gold to derive the value of long-term capital gain. Such gain is chargeable to tax at 20 per cent plus a cess of 4 per cent on the income tax amount. Hence, the total tax will be 20.08 per cent.

However, if you have sold the gold within a short period, i.e. before the expiry of 36 months from the date of purchase, include such short-term capital gains in your gross total income and compute tax on total taxable income according to the regular tax bracket. 

Tax on Sale of Digital Gold is Same as That of Sale of Physical Gold

During the COVID-19 pandemic, digital gold has gained immense popularity. Digital gold provides safety, convenience and purity, which is relatively less possible in physical gold. You can purchase e-gold from metal trading companies (SafeGold or MMTC-PAMP) through various online platforms. Various apps and websites such as Paytm, Motilal Oswal, Google Pay, etc., provide such online platforms for the investors. The metal trading companies store digital gold in a secured and safe locker on behalf of the investor. However, it is not regulated by any government body such as SEBI or RBI. 

The tax treatment on digital gold is the same as that applicable to physical gold.  

Tax on Sale of Sovereign Gold Bonds 

The RBI issues the Sovereign Gold Bonds on behalf of the government. It is the substitute for holding physical gold. You can redeem the bonds after eight years of maturity. However, you can early redeem the bonds at the end of five years of purchase. Moreover, the investor has an option to sell the Sovereign Gold Bonds in the secondary market. The issued gold bonds list on the stock exchanges. Tax implications on the sale of SGB are as follows:

1. Redemption of SGB on maturity: Any gain on gold bonds redeemed after eight years, i.e. on maturity, is exempt from tax.
2. Early redemption after five years: Any gain on the sale of SGB after five years shall be a long-term capital gain. And 20 per cent tax is chargeable on such long term capital gain after indexation.
3. Sale of SGB through the stock exchange: Any gain on the sale of SGB through the secondary market is taxed based on long term or short term capital gain. If the SGB is sold within 36 months of purchase, then tax is paid based on the normal tax slab of the individual. Otherwise, a long-term capital gain is taxed at 20 per cent and 4 per cent cess.

The investor receives interest at the rate of 2.5 per cent per annum on a half-yearly basis. This interest income shall be included under the head “Income from other sources” and taxed accordingly.

However, the sale of other paper gold investments such as mutual funds and Exchange Traded Funds (ETFs) is taxed similar to that of physical gold.

For any clarifications/feedback on the topic, please contact the writer at namita.shah@cleartax.in