Understanding tax exemptions on ETF

Feb 04 2013, 09:08 IST
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People consider the investing in gold as a safe option and hold physical gold, gold bonds or gold ETFs. (THINKSTOCK) People consider the investing in gold as a safe option and hold physical gold, gold bonds or gold ETFs. (THINKSTOCK)
SummaryPeople consider the investing in gold as a safe option and hold physical gold, gold bonds or gold ETFs.

People consider the investing in gold as a safe option and hold physical gold, gold bonds or gold ETFs.

Each of them has its own merits in terms of convenience of acquiring it and its resale value.

One also needs to understand the tax consequences of each of them and decide the best option to invest in. Gold ETF units as well as physical gold are considered as assets under the Income Tax laws; hence, the sale of these assets procures capital gains or loss.

However, there are certain tax advantages of buying gold Exchange Traded Funds (ETF) over others.

What is Gold ETF?

Regarded as Mutual Fund units, the minimum holding period for such assets to qualify as long-term assets is a year. As these are not equity oriented mutual funds, long-term capital gains (LTCG) on the sale of gold ETFs does not qualify for tax exemption.

Short-term capital gains (STCG) would also not be eligible for concessional rate of taxation. However, these are eligible for the concessional LTCG tax rate at a minimum of 10 per cent of the gains without indexation or 20 per cent of the gains with indexation.

The long-term gains on sale of such ETFs are taxed at a maximum of 10 per cent of the gains. STCGs are taxed at normal rates.

Gold has to be held for three years to be termed as long-term capital assets, while gold ETF need to wait for just a year to get the status.

Advantages of gold ETF

Low tax rate: LTCG are procured from the sale of long-term capital assets while STCG come from short-term capital assets. Short-term capital gains are charged at the normal tax rate or 15 per cent in the case of shares or units on which short-term taxes are deducted.

The income tax department prescribed a lower rate of tax at 20 per cent of LTCG.

If you sell your gold ETF after 12 months, you would need to pay just 10 per cent of gains as tax; while in case of gold sale after a year, the tax rate will be much higher.

Tax exemption provisions: LTCG benefits from exemption under section 54F and 54EC.

As gold ETF becomes a long term capital asset in just one year, whereas physical gold needs to wait for at least three years to avail such exemptions.

Wealth tax exemption: Gold bars are liable to wealth tax, which is

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