21/02/2017
We Indians do love the shiny yellow metal. So much so, that between March and December 2016, gold imports in India had reached the hereto unmatched level of Rs. 2295 billion (approx.). Though a majority of the imported gold actually makes its way to the jewelry store, a relatively smaller number look at gold as an investment. The traditional concept of investing in gold is its use as a hedge against market uncertainty hence, when capital markets witness a downturn, gold rates rise and vice versa. From an investment perspective, the options available for gold investments in India include:
Physical Gold
As the name suggests, this involves investing in gold in the physical form as in jewellery, bars and coins. These are subject to taxation rules that are different from gold investments made through DEMAT formats.
Gold ETFs
ETF stands for exchange traded funds and they are traded on stock exchanges like company shares. Gold investments made through ETFs are subject to long term and short term capital gains. The prices of these are determined based on multiple factors that affect global gold prices.
Gold Mutual Funds
These are mutual funds that exclusively invest in gold ETFs. They can be bought and sold as units similar to other mutual funds and the price of units would vary based on daily market movements. From the perspective of taxation, these mutual funds are treated similar to debt funds and are subject to long-term or short-term capital gains.
Paper Gold Schemes
Instead of investing in physical gold, many investors are seeking out paper or e-gold investment options. In this form, gold is bought and sold in grams similar to its physical form, however, no actual gold changes hand at the time of buying and selling. Domestic gold prices play a crucial role in determining the trade price and these schemes have unique taxation rules that set them apart from other gold investments. By far the most popular one in this category is the Sovereign Gold Bonds backed by the Government of India.
Tax Treatment of Physical Gold
For starters, whenever you are buying physical gold valued above a certain amount, you have to share a copy of your PAN card with the seller whether it is a jewellery store or the bank selling you gold coins. For the most part, the taxation rules of physical gold are the same as in case of gold ETF i.e. long/short term capital gains options, however, there is one key exception.
By design, capital gains occur when you sell an asset such as gold after a period of time, thus no sale means no tax on the asset. But in case of gold, owing the gold does come with the probable tax liability in the form of wealth tax. However, when calculating your taxable wealth, assets such as real estate, car and cash excess of Rs. 50,000 are also considered. In case of gold jewellery, the valuation would not just depend on the amount of gold but also on any precious/semi-precious stones that are set into the pieces. A registered valuer’s certificate is mandatory in case the value of jewellery exceeds Rs. 5 lakhs.
Current rate of wealth tax is 1% of the amount of wealth in excess of Rs. 30 lakhs. Missing out on this payment will invite penalty at the rate of 1% per month of the amount of tax that remained unpaid.
Tax Treatment of Gold ETFs and Gold Mutual Funds
For taxation purposes, gold exchange traded funds and mutual funds are treated similar to non-equity or debt mutual funds and they come under the purview of capital gains taxation rules. Capital gains taxation rules are divided into two key categories – short term capital gains and long term capital gains. Short term capital gains in case of gold funds occur when profits are made prior through selling of the holdings/units within 3 years i.e. within 36 months of making the investment. Long term capital gains rules on the other hand come into effect if the sale is made more than 36 months after the purchase is completed.
Short term capital gains rules: When short term capital gains come into effect, the rate of tax applicable depends on the current tax bracket you are in. The following are the applicable income tax brackets for the 2017-2018 assessment year.
| Taxable Income | Income Tax Rates |
| Up to Rs. 2.5 lakhs | Tax Exempt |
| Over Rs. 2.5 lakhs and up to Rs. 5 lakhs | 5% on amount exceeding Rs. 2.5 lakhs |
| Over Rs. 5 lakhs and up to Rs. 10 lakhs | 20% on amount exceeding Rs. 5 lakhs + Rs. 12,500 |
| Over Rs. 10 lakhs | 30% on amount exceeding Rs. 10 lakhs + Rs. 112,500 |
Hence if you make a profit of Rs. 20,000 and you are in the 30% tax bracket, your short term capital gains tax would be Rs. 6000. In case of senior citizens i.e. those over 60 years of age, the tax slabs are relaxed to a further extent as per existing Income Tax and short term capital gains rules.
Long term capital gains rules: As mentioned earlier, long term capital gains are applicable to sale of gold after it has been held in any of the above forms for at least 36 months. The rate of tax in this case depends on whether indexation has been carried out or not. Indexation refers to the process of adjusting for inflation in the market. Indexed funds calculate returns after factoring in the effect of rising inflation, hence on paper the percentage value of your gains are reduced, which reduces your tax outgo. As per existing rules, the applicable long term capital gains tax rate is 20% in case of indexed funds, while this rate is 10% in case of non-indexed funds. There is also an additional 3% on the total tax liability calculated using the above formula.
Tax Treatment of the Sovereign Gold Bond
The sovereign gold bond backed by the government of India is a unique scheme, which is designed at least in part to reduce the country’s reliance on imported gold. The gold units are sold as grams of gold with a limit of 500 grams for each investor and linked to the market rate of gold. As gold in this format is linked to the prevailing market prices, the initial offering price (market price of gold + Government determined markup) and the rate of return are liable to vary from one issue to another. As of now capital gains taxes are not applicable when redeeming these bonds and indexation benefits may be applicable at the time of redemption or transfer. There is however a lock-in period of 5 years and the current maturity of the bonds is fixed at 8 years. No TDS is applicable to interest earned from sovereign gold bonds however standard tax rules related to interest earned are applicable.
From the above discussion it should be clear that investing in gold in paper or DEMAT form has a range of tax benefits as opposed to the physical form. This is just one of the many reasons why DEMAT gold investments and gold funds are a popular diversification alternative among Indians
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About the author
vijay rai
ACCOUNTS AND TAX CONSULTANTS
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