How are Different Forms of Gold Investments Taxed

Taxation on Digital Gold Investment

• Point to note – Digital gold investment is treated similarly to physical gold ownership when it comes to taxation on gains.

Digital gold ownership is the latest mode of investment, which has found immense popularity among youngsters. With easy affordability and convenience of investment, digital gold investors should know about the applicable taxability. 

Owning digital gold assets for less than 36 months ensures that returns are not taxable directly. In the case of long-term capital gains, you would need to pay a 20% tax on returns outright, along with a surcharge and 4% cess. 

Therefore, if you decide to encash your investment after a span of, say 5 years, get ready to pay these charges first. Here too, the holding period determines the amount of taxes you would need to service.

Taxation on Physical Gold Investment

• Point to note – Individuals selling physical gold will need to bear 20% taxes, along with a cess at 4% for long-term capital gains or LTCG.

Assessing your tax liabilities from physical gold sales is simple if you can differentiate between short-term capital gains and long-term capital gains. 

With the former, you must sell the assets within 36 months of buying them. If you sell them any later, the returns will be considered long-term capital gains.

For STCG, the return from a gold sale is added to your annual income and taxes are charged as per your applicable income tax slab rate.

LTCG investors of physical gold, on the other hand, will have to bear 20% of the returns as taxes, with the addition of any surcharge if applicable. Moreover, a 4% cess also applies for these transactions, with indexation benefits.

Lastly, you would also need to pay a Goods and Services Tax when buying physical gold. Thus, as evident, physical gold investment is subject to a wide range of taxes.

Taxation on Paper Gold Investment

• Point to note – Taxation on gold ETFs and mutual fund returns are similar to those of physical gold. However, returns from SGB follow a different system of taxation.

If you invest in gold through mutual funds or Exchange-Traded Funds, the rate of taxes would be 20% plus a 4% cess for long-term capital gains. 

Again, short-term investors (with tenures up to 36 months) will not have to bear taxes directly on their gains. Instead, such income is added to their earnings from other sources and taxes are charged according to applicable slabs.

However, if you choose to invest in sovereign gold bonds, you would earn an interest of 2.5% per year. Such interest earnings are categorised as income from other sources and taxed accordingly. 

Any returns you acquire after 8 years of SGB investment are completely tax-free. Another crucial point to remember is that different tax rates are applicable on SGB returns in case of a premature exit.

Most SGB offerings come with a lock-in period of 5 years. If you choose to sell the assets at any point after this time and before reaching maturity, all returns from such transactions are treated as long-term capital gains (20% tax + 4% cess + surcharge).

Taxation on Returns from Gold Derivatives

• Point to note – 6% of the returns are claimed as taxes when the total turnover of the concerned business is limited to less than Rs. 2 crores in that year.

You can claim returns from gold derivatives as business income, which can decrease the tax burden from such transactions. In order to enjoy the benefits under Section 44AD of the Income Tax Act, you would not need to maintain a precise record of the business’s books and accounts.

In this presumptive tax scheme, your company can limit gold derivative tax outgo to just 6%. The only condition is that the business’s yearly turnover must not exceed Rs. 6 crore.

Annual turnover is the summation of profit and loss for each transaction.

How Can You Save Taxes on Long-Term Capital Gains from Gold Investments?

If you do not intend to bear 20% taxes on your long-term gains from gold investment, you have two options. 

Sections 54F and 54EC of the Income Tax Act offer certain provisions that can help in reducing such tax liabilities.

Under Section 54F, you can re-invest the returns from the gold LTCG into a residential property. Doing so ensures tax exemption on the entire earnings.

Similarly, under Section 54EC, investing the returns into eligible bonds grants you immunity from having to bear taxes on these incomes. 

Taxation on Gold Received as a Gift or an Inheritance

Apart from its monetary value, gold bears a degree of sentimental value for most Indians. In some cases, pieces of jewellery may have been in your family for generations, passed down over the years.

Moreover, the gifting of gold items is considered auspicious in certain cases. 

Therefore, apart from tax liabilities on investments, you should also know your tax burdens when receiving the yellow metal as a gift or as part of your inheritance.

• Taxation on gold received as gifts – You do not need to pay any taxes when you receive gold as a gift from close relatives, such as parents, siblings or children. However, if you receive them from a non-relative, taxes would be applicable under the header of income from other sources, provided the value of such gifts exceeds Rs. 50000.

Also, selling gold received as gifts will draw taxes as applicable on physical gold investment, as per STCG and LTCG norms.

• Taxation on gold you inherit – If you inherit the assets from a blood relative, you do not need to pay taxes. For other inheritances, you would have to bear taxes if the value of the assets crosses Rs. 50000.

Here too, LTCG and STCG norms apply when selling the inherited gold. To determine the holding period, you would need to consider the date of acquisition for the original owner of the items. 

Calculate your tax implications beforehand to reduce hassle. Keeping all of these factors in mind should help you set realistic expectations regarding returns on gold investments.

Hope this was helpful!

Happy Investing!

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.