If you are willing to invest in gold, then you should know how you are taxed and also the tax implication on income through this investment.
Gold buying is amongst the most cherished and preferred investment options for many Indians to create wealth. Festive and wedding season brings the yellow metal into limelight, but for investors it probably never loses its sheen in any season. Gold is believed to be one of the best hedges against the inflation and is often termed as a saviour during any adverse economic situation.
The government has launched several measures in the past like Sovereign Gold Bond (SGB), Gold Monetisation Scheme, imposing tax on gold jewellery etc. to control gold import. Earlier, PAN details were needed for buying gold over Rs 50,000, but recently the government increased the limit to Rs 2 lakh. If you too like to invest in gold, then you should know how you are taxed and also the tax implication on income through this investment.
GST impact on gold investment
Physical gold is taxed at 3% under the GST, whereas investing in the SGB or the gold ETF doesn’t attract this tax. The making charge on gold jewellery attracts 18% GST. So, if you are looking at gold from an investment perspective, then SGB and gold ETF have a distinctive edge over the physical gold.
Short and Long-term capital gain tax on gold investment
If you invest in gold and sell it by holding less than 3 years, then any gain on such investment is considered as short-term capital gain (STCG). If you hold the investment for more than 3 years, then it is considered as a long-term capital gain (LTCG). For physical gold, ETF and SGB, the tenure for STCG and LTCG applies in the same way. The tax treatment for STCG and LTCG on gold investment are different. Let us take a look at the tax implications when you invest in the gold.
Short-term capital gain tax calculation on gold investment
If you have booked the profit on gold in the short term, then you need to pay STCG tax at the applicable income tax slab rate. For example, you invested Rs 2 lakh in physical gold and held it for 2 years, and thereafter sold in the market for Rs 2.5 lakh. In this case you made a short-term capital gain of Rs 50,000. Therefore, such income would be added to your regular income and it will be taxed at applicable rate (i.e. 5%, 20% or 30% rate).
Long-term capital gain tax calculation on gold investment
If you hold on gold investment for more than 36 months and thereafter book the profit, then the gain on such transaction will be treated as LTCG and it will be levied with 20% tax with indexation benefit. LTCG is calculated using the following method:
LTCG= Net selling price of Gold ‘Less’ Indexed cost of gold
(Indexed cost of the gold = Cost of purchase x (cost inflation index (CII) in the year of sales/CII in the year of purchase))
Thereafter, LTCG is taxed at a 20 % rate. You can save LTCG tax by investing the capital gain amount in a residential property U/s 54 or by investing such amount U/s 54EC in the eligible bonds such as REC and NHAI bond.
The LTCG tax treatment for physical gold, ETF and SGB is the same as discussed above. However, if you hold investments in SGB till maturity (8 years) and then redeem it, then the entire gain would be exempt from the tax. When you invest in the SGB, then you also earn interest income at the prevailing rate (at present 2.5% Pa). Such interest income is taxed as per the applicable tax rate of the individual i.e. 5%, 20% or 30% rate.
If you are looking to invest in gold, then you should explore investment opportunities in SGB and gold ETFs. SGB provides the additional benefit of interest income and it is also more tax efficient if you invest for long-term. SGB and ETF allow you facility to invest as low as 1 gram gold and it also provides you better security in comparison to the physical gold. Therefore, weigh your options well before you invest.
(The writer is CEO, BankBazaar.com, an online marketplace for loans, insurance, mutual funds, credit cards, and more.)