Gold and ITR: How different forms of gold investment and sales, purchase need to be shown in tax return

By: | Updated: July 21, 2018 12:16 PM

Gold is one of the precious chemical elements for the mankind. It was first discovered in the form of shining and yellow nuggets. Since its discovery, gold is always used as a benchmark to determine the value of underlying currency.

income tax return filing, income tax efiling, tax filing mistakes, common tax-filing mistakes, ITR, wrong ITR form, Foreign Assets and IncomeThe Income-Tax Act contains a couple of provisions to deal with the taxability of gold and gold derivatives.

Gold is one of the precious chemical elements for the mankind. It was first discovered in the form of shining and yellow nuggets. Since its discovery, gold is always used as a benchmark to determine the value of underlying currency. Nearly all countries represent the value of their currencies in the form of gold. From ancient times investment in gold has always been considered as lucrative and rewarding. Gold probably is the only thing which can be used for personal investment as well as for personal use.

With the advent of trading exchange, it is now not required to make investments in physical gold. The money can be invested in Gold Exchange Traded Fund (ETF), Gold Monetisation Scheme or Sovereign Gold Bonds. The Income-Tax Act contains a couple of provisions to deal with the taxability of gold and gold derivatives. Gold is always treated specially by the I-T Act. As a general rule, any profit arising from the sale of personal effects is not chargeable to capital gains tax, as gold is categorized as an exception. However, any profit arising from investment in gold, notwithstanding the fact that it is used for personal use, is charged to tax under the head Capital Gains.

In this brief write-up, we have enumerated the taxability and disclosure of profits arising from sale of gold and gold-related securities.

1. Physical Gold

Physical gold can be in the form of jewellery, gold coins, gold bars, so on and so forth. Physical gold is considered as capital asset for income-tax purposes. Hence, profit on sale of physical gold shall attract capital gain tax liability in the hands of the transferor, except under certain circumstances like transfer of gold as a gift, Will or by way of inheritance, etc. The nature of capital gain and rate of tax thereon shall depend upon the period of holding, which has been explained below.

Period of Holding Nature of Capital Gain Tax Rate Benefit of indexation
More than 36 months Long-term capital gain 20.00% Yes
36 months or below Short-term capital gain Normal slab rate No

If a person is engaged in the business of sale or purchase of gold or jewellery, the income shall be taxable as business income and not as capital gain.

When any form of gold is received by a person without consideration or for inadequate consideration and the fair market value of the benefit is Rs 50,000 or more, it is considered as residuary income of the recipient and, hence, taxable under the head ‘income from other sources’. However, this provision does not apply to any sum of money or any property received from specified relatives or on occasion of marriage, or under a Will or by way of inheritance.

As mentioned above, any transfer of a capital asset as a gift or Will or an irrevocable trust is not regarded as transfer for capital gain tax purposes. Hence, transferor shall not be liable to pay capital gain tax under such situations. Though no tax implication shall arise either in the hands of a recipient or transferor at the time of transfer of asset, yet capital gain tax liability arises in the hands of a recipient in case of subsequent sale of property. In such a case, the actual cost of acquisition of the property to the previous owner shall be considered as the cost of acquisition to the recipient. While determining the period of holding, the period of holding of the previous owner shall also to be taken into consideration.

2. Gold Exchange Traded Fund (ETF)

Gold ETFs are traded fund schemes that invest the money collected from investors in terms of gold’s worth. Thus, when someone invests in Gold ETF, he doesn’t own the gold but when he redeems the units of ETF he gets the cash equivalent to the market value of deemed investment in gold. Gold ETFs are traded on stock exchange and can be in paper or dematerialized form. Units of Gold ETFs are treated as debt funds and, hence, are taxed in the same way as physical gold.

3. Gold Monetisation Scheme

The ‘Gold Monetisation Scheme-2015’ was notified by the government with a view to provide different options to the people to monetize the privately-held stock of the gold. Under this scheme, a person gives a consent to melt the gold deposited by him. Thereafter, the bank opens a “Gold Savings Account” for such person and credits the ‘quantity’ of gold into his account.

Deposit Certificates issued under Gold Monetisation Scheme, 2015 are excluded from the definition of capital asset and, therefore, no capital gain shall arise in the hands of depositor at the time of redemption. Further, interest earned on such deposit is also exempt from tax under section 10(15) of the Income-Tax Act.

4. Sovereign Gold Bond

The Government of India had introduced the Sovereign Gold Bond Scheme with the aim of reducing the demand for physical gold so as to reduce the outflow of foreign exchange on account of import of gold. Under the scheme, Sovereign Gold Bonds are issued by the Government of India which are linked with the market price of the gold.

The interest on the Gold Bonds is taxable as per the provisions of the Income-Tax Act, 1961. However, the capital gain arising on redemption of these bonds to an individual is not taxable as redemption value of such bonds is excluded from the definition of transfer. But such benefit is not available if the bonds are transferred from one person to another before the expiry of such bonds.

Reporting in Income Tax Return

Income earned from gold shall be reported in income tax return (ITR) as follows:

Income Taxability Reporting in ITR
Income from business of sale or purchase of gold Taxable as business income Required to be reported as business income under Schedule PL and Schedule BP in ITR 3
Income from investment in physical gold Taxable as capital gain income Required to be reported under Schedule CG in ITR 2 or ITR 3
Income from investment in Gold ETFs Taxable as capital gain income Required to be reported under Schedule CG in ITR 2 or ITR 3
Interest earned from deposit under ‘Gold Monetisation Scheme-2015’ Exempt from income-tax Required to be reported as exempt income in return filed in ITR 1 to 4.
Capital gain arising on redemption of deposit under ‘Gold Monetisation Scheme-2015’ Not taxable as deposits under ‘Gold Monetisation Scheme-2015’ are excluded from the definition of capital asset. Not required to be reported in ITR.
Interest on Sovereign Gold Bond Taxable as other sources income Required to be reported in return filed in ITR 1 to 4
Capital gain arising to an individual on redemption of Sovereign Gold Bond Not taxable as not covered under the definition of transfer Not required to be reported in ITR.

Thus, the above-mentioned factors should be taken into consideration while reporting the income earned from gold in the ITR.

(By CA Naveen Wadhwa, DGM, and CA Dipen Mittal, Manager, Taxmann.com)

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