How different forms of gold investments are taxed

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February 24, 2021 4:02 PM

People investing in gold via gold bonds will bear different tax liabilities compared to those opting to purchase physical gold. Some of the different modes of gold investments include digital gold, physical gold, derivative contracts, and paper gold.

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In July 2020 gold prices crossed the Rs 50,000 (per 10 gram) mark in India, for the first time. Be it Indian households or investors, many people rely on gold investments for ensured and substantial returns.

However, what most people do not consider is the risk of losing out a significant chunk of returns on investment by way of income tax, say, industry experts. Hence, depending on your chosen mode of gold investment, you must know the taxation on returns. For instance, people investing in gold via gold bonds will bear different tax liabilities compared to those opting to purchase physical gold.

Some of the different modes of gold investments include digital gold, physical gold, derivative contracts, and paper gold.

Here is how different forms of gold are taxed:

Physical Gold Investment

The most common form of gold investment is physical gold, be it in the form of jewellery, bars or coins. Depending on the tenure of gains, such as short-term capital gains and long-term capital gains, physical gold sales are taxed.

With short-term capital gains, the investor needs to sell the assets within 36 months of buying them. After the period of 3 years, the returns will be considered as long-term capital gains. Also, the return from a gold sale for short term capital gains is added to the investor’s annual income and taxed as per his/her applicable income tax slab rate.

In the case of long term capital gains, investors need to pay 20 per cent of the returns as taxes, with the addition of any surcharge, and 4 per cent cess, with indexation benefits. Additionally, Goods and Services Tax (GST) is also applicable when buying physical gold.

Digital Gold Investment

When it comes to taxation on gains, digital gold investment is treated in the same manner as physical gold. Digital gold is the latest model of investment, which has recently become popular especially among youngsters. Investment in digital gold can be done through different mobile wallet apps, and the minimum value of the gold that can be purchased is Re 1.

Long-term capital gains from digital gold are taxed at 20 per cent on returns, along with 4 per cent cess and surcharge. If digital gold is held for less than 36 months, returns are not taxable directly.

Hence, experts say if an investor plans to encash their investment after a span of 4 or 5 years, they will have to pay these charges. Having said that, the holding period of the digital gold determines the amount of taxes an investor needs to pay.

Paper Gold Investment

Paper Gold investments range from mutual funds, exchange-traded funds (ETFs), and sovereign gold bonds (SGBs). The amount of gold is held on paper, and not physically.

Among these paper gold investments, taxation on mutual fund returns and gold ETFs is similar to that of physical gold. On the other hand, returns from sovereign gold bonds are taxed differently. For instance, similar to physical gold, gold investment through mutual funds or ETFs is taxed at 20 per cent plus 4 per cent cess for long-term capital gains.

Similarly, investors with tenure up to 36 months (short-term), will not have to bear taxes directly on their gains. These incomes are added to their earnings from other sources and are taxed according to applicable slabs. Note that with investments in sovereign gold bonds, investors earn an interest of 2.5 per cent per year, which is categorised as income from other sources and taxed accordingly.

Also, returns of the investor after 8 years of sovereign gold bonds investment will be completely tax-free. Having said that, in case of a premature exit, different tax rates are applicable on SGB returns. Usually, sovereign gold bonds come with a lock-in period of 5 years, and if the holdings are sold at any point after this time and before reaching maturity, all returns from such transactions will be treated as LTCG and will be taxed at 20 per cent along with 4 per cent cess and surcharge.

Returns from Gold Derivatives

The underlying asset in some derivative contracts is gold. These assets have separate taxation norms and are primarily available to businesses only.

For instance, when the total turnover of a business is limited to less than Rs 2 crore in a year, 6 per cent of the returns is taxed. As business income, one can claim returns from gold derivatives which can decrease the tax burden from such transactions.

Industry experts say one would need to maintain a precise record of one’s business’s books and accounts, in order to enjoy the benefits under Section 44AD of the Income Tax Act.

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