Question: Recently, the prices of gold have hit an all-time high. Kindly guide us on the tax implications on sale of physical gold as well as sale/ redemption of Sovereign Gold Bonds for retail investors.

Answer given by Dr. Suresh Surana, Founder, RSM India: Gold investments in India are very popular due to their cultural significance. Furthermore, investment in gold is acknowledged as a hedging tool against inflation and global uncertainties. Traditionally, Indians purchase gold on auspicious occasions such as weddings and festivals.

Investors may opt for investment in physical gold like jewellery or gold coins or invest in gold exchange traded funds, sovereign gold bonds or gold mutual funds for more liquid and manageable investments. It is pertinent to note that the taxability of the same shall depend on various factors such as the period of holding, nature of investment etc.

Also Read: How to maximize tax benefits for senior citizens in India

The tax implications of physical gold and sovereign gold bonds as per the Income Tax Act, 1961 (herein after referred to as ‘IT Act’) are stated below:

Tax Implications on Sale of Physical Gold

Taxpayers can hold physical gold in the form of coins, jewellery, bullions, etc. The taxability of the gains arising on sale of gold investment would depend on whether it is held as “stock-in-trade” or as “personal asset/investments”. The individuals holding physical gold as stock in trade would be liable to tax under the head of “Profits and Gains of Business or Profession” whereas and in cases otherwise, profits arising on sale of gold shall be taxed under the head of “Capital Gains”. Thus, retail investors would be subject to capital gains tax on sale of gold investments.

The term capital asset as defined u/s 2(14) of the IT Act excludes personal assets of the individual such as wearing apparel and furniture, however such exemption is not applicable to jewellery or ornaments. Therefore, any profit or gains arising from sale of physical gold held in the form of investment or as personal assets shall be taxable as long-term capital asset u/s 112 of the I-T Act at 20% (plus applicable surcharge and cess @ 4%) along with indexation benefit where the period of holding is more than 36 months. In cases otherwise, it shall be taxed as short-term capital asset as per the marginal slab rates applicable to the investor.

Tax Implications on Sale/ Redemption of Sovereign Gold Bonds (“SGB”)

SGBs are government securities denominated in grams of gold and are linked to the prevailing market price of gold and are listed on stock exchanges. The redemption term of the bonds is 8 years, though they are freely tradeable / transferable in the secondary market on the stock exchange even before the term of 8 years. These bonds allow investors to invest in gold in a convenient and secure manner without the need to physically own or store the precious metal.

a. Tax implications on Interest Income

The aforementioned SGBs holders are eligible to receive income in the form interest at the rate 2.5% p.a on the amount of initial investment. Since such income is not exempt from tax under the provisions of I-T Act, it shall be taxed at the prevailing slab rates under the head “Income from Other Sources”.

b. Tax implications on Redemption on Maturity of the SGBs

Section 47(viic) of the I-T Act provides that any transfer of sovereign gold bonds issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption by an individual shall not be regarded as “transfer”. Therefore, individual taxpayers redeeming their SGB investment at maturity will not be liable to pay any capital gains tax.

c. Tax implications on Sale/Transfer of SGBs prior to Redemption

In case the investor has opted for sale/ transfer of SGBs prior to redemption, he/she would be liable to pay capital gains tax. Any gains arising out of sale/transfer of sovereign gold bonds before their maturity would be taxable as long term capital gains @ 20% (with indexation benefit) or 10% (without indexation benefit), whichever is more beneficial.

Disclaimer: The views and facts shared above are those of the expert. They do not reflect the views of financialexpress.com.