Income Tax on Gold in India
I. Introduction
- Importance of gold in Indian culture and investment
Gold is an important metal in India. It holds financial as well as a cultural significance, where it is often considered auspicious to buy gold. This is not a recent development, the practice of purchasing gold has been in place for decades at least. Keeping the cultural significance aside, gold also is a fantastic investment from a financial point of view. The metal has an extremely good demand in the primary as well as the secondary market, and has performed exceptionally well over the last couple of decades. The financial performance coupled with the liquidity it offers, make gold one of the best alternative investments available to the investors.
- Overview of how gold holdings and transactions are subject to taxation
Gold is treated as an asset in India, and the returns generated from gold investment are given a suitable tax treatment. Depending upon the tenure of investment, and the returns generated from the transactions the applicable taxes are calculated, and the beneficiary is liable to pay these taxes.
- Purpose of the article
Since gold for many is not a financial asset, rather more of a cultural asset, more often than not, the applicable taxes are not expected until the investor is liable to pay. In this article we aim at clarifying different tax implications for gold investments.
II. Types of Gold Assets Covered Under Taxation
- Physical Gold
Jewelry, bars, and gold coins are some of the most purchased forms of gold in India. The demand for physical jewellery is substantially higher than the gold in digital forms mainly due to the fact that gold is also purchased for cultural or wedding purposes, and the sense of tangibility gives comfort to the buyers. However, as opposed to popular belief, physical gold is not void of taxes. The investor is liable to pay applicable short term or long term capital gains depending upon the holding period of the asset.
- Digital Gold
Digital gold is a fairly new gold instrument. It is purchased via apps, platforms. The main benefit of digital gold is that the investor who wants to purchase gold solely from an investment point of view can save on costs such as storage costs, making charges, etc. which comes with physical gold purchase. This type of gold too is covered under the taxation laws, and the investor is liable to pay taxes on the returns generated from investment in these instruments.
- Gold ETFs and Mutual Funds
Gold ETFs and Mutual funds with exposure in gold assets are some of the modern ways to get exposure in gold assets, and these too come under the purview of Indian taxation laws.
- Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are government issued securities offering returns in the form of interest income as well as price fluctuations. While the interest component is treated as per the investor’s applicable income tax slab, the returns made by price fluctuations are treated as per the applicable gold capital gains tax which is dependent upon the holding period. I.e. if the security is held for less then 3 years then short term capital gains are applicable on the returns and if it is held for over 3 years then long term capital gains is applicable of 20% with indexation benefits
III. Tax Implications on Buying Gold
- Applicability of GST (Goods and Services Tax)
There are certain taxes and charges which are applicable on the purchase of physical gold as well as gold instruments. Goods and service tax on gold purchase being one of them, it is levied on both physical and digital gold.
- 3% on gold value : A 3% goods and service tax (GST) is an applicable tax on gold jewelry sale on the gold’s purchase value and is charged to the investor.
- Making charges (if applicable) : Making charges are only applicable in the case of purchase of physical gold. And more specifically gold in the form of utensils, jewellery, etc. it is a charge levied by the gold seller as a consideration for transforming the gold from its raw form to the final form.
IV. Tax on Selling Gold
- Capital Gains Tax
- Short-Term Capital Gains (STCG)
* Short term capital gains tax as the name suggests is applicable when the gold or financial instrument is held only for a short term. I.e. held for less than 3 years, in such cases the investor will have made returns from the short term volatility of the security.
* Taxed as per income tax slab : Short term capital gains tax is applied as per the investor’s income tax slab. Let’s suppose the investor comes under the income tax slab of 30% then the liable tax would be 30% on the total returns made from the transaction.
- Long-Term Capital Gains (LTCG)
* Held for more than 3 years : as opposed to the short term capital gains, Long term capital gains (LTCG) are applicable if the gold security is held for over 3 years in total.
* 20% tax with indexation benefits : In case of investment horizon of over 3 years, capital gains tax on gold is charged as per the prevailing LTCG tax. Currently the applicable LTCG on gold investment stands at 20% with indexation benefits. I.e. a 20% tax adjusted after indexation will be charged on the total returns made between the purchase and sale consideration of the gold.
- How Capital Gains Are Calculated
- Purchase price vs. selling price : Capital gains are calculated based on the purchase price and the selling price of the instrument. It takes into account the total returns made on the total trade. I.e. Total sale consideration minus the total purchase consideration. (Selling price - Purchase price).
- Use of indexed cost of acquisition : Indexation benefit can be availed on long term capital gains on gold investments. How indexation works is that the selling price is adjusted to inflation. This allows the investor to calculate real returns adjusted for inflation and save on applicable taxes.
V. Tax on Inherited or Gifted Gold
- Gifted Gold
- Tax-free if received from specified relatives : Since gold holds such an important cultural significance in India, and is a preferred gift within family, gifted gold between special relatives is tax free only on suitable occasions such as marriage.
- Taxable if value exceeds ₹50,000 and received from non-relatives : If the gold value exceeds INR 50,000 from non-relatives i.e. friends, colleagues, etc. then the party receiving the gift is liable to pay applicable taxes on the gift.
- Inherited Gold
- No tax at the time of inheritance : At the time of inheritance i.e. transfer of ownership of gold from one party to their inherits, the receiving party is not liable to pay an inheritance tax on gold.
- Capital gains tax applicable if sold : If the inherited gold is later sold by the party who received the gold in inheritance then they’d be liable to pay applicable STCG/LTCG depending upon the period of holding.
- Indexed cost based on original owner’s acquisition : the indexation benefit is calculated based on the date when the original owner acquired the gold, and the benefit is passed down at the time of sale of gold by the inheriting party.
VI. Tax on Gold in Investment Forms
- Gold ETFs & Mutual Funds
- Taxed like non-equity mutual funds (STCG & LTCG rules) : Gold ETFs and mutual funds are taxed like non-equity mutual funds where the tax liability is calculated based on the total returns made and the term for which the gold was held. If held for under 3 years then short term capital gains apply, and if held for over 3 years then long term capital gains apply on the total returns generated.
- Sovereign Gold Bonds (SGBs)
- Interest income taxable (as per slab) : Sovereign Gold Bonds (SGBs) offer interest income apart from the returns generated in the form of change in market value. This interest income is taxed as per the investor’s tax bracket as it is deemed as a regular income and not gains made through sale of the asset.
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No LTCG tax on redemption after maturity (8 years) : One of the best features of Sovereign Gold Bonds (SGBs) is that the investor is not liable to pay any taxes in the form of Long term capital gains (LTCG) if the instrument is held till maturity. Unlike investment in other financial instruments. This helps in minimizing tax liability and boost overall returns.
- LTCG applicable if sold before maturity in secondary market : If the SGBs are held for over 3 years but not till maturity and sold in the secondary market, then the investor is liable to pay long term capital gains tax (LTCG) on the total returns generated. However, the investor can avail indexation benefit of upto 20% which can help minimize the total tax liability on the returns generated.
VII. Disclosure Requirements and Income Tax Return (ITR)
- Mandatory reporting of high-value gold transactions : It is essential to report high value transactions in gold to ensure that the transaction is not reported as a case of money laundering. Most jewellers ask for a PAN card at the time of sale to record the purchaser’s identity.
- PAN requirement for purchases over ₹2 lakh : PAN card is required if the gold purchase is over INR 2 lakhs, this enables the tax authorities to track and record the purchase against the PAN of the buyer and tax liability is captured in the form.
- Disclosing gold in ITR (if applicable under assets section) : While declaring assets, it is also mandatory to declare the amount of gold held in the form of assets, this helps in accurate calculation of the net worth and tax liabilities.
IX. Tips for Gold Investors to Stay Compliant
- Maintain proper purchase and sale records : It is important to maintain the records and documents that can be used to verify the date of purchase as well as the price of purchase of the metal. This helps in accurately calculating the total returns made over the timeframe of investment and accordingly helps calculate accurate tax liability and not rely on estimates.
- Declare gold properly in tax filings (especially in case of scrutiny) : To be able to accurately calculate the tax liability, it is essential to declare the gold accurately under the correct header at the time of tax filing. It is recommended to take help of a chartered accountant or a tax consultant if you’re unsure how to record the purchase of gold and what would be the correct tax treatment.
- Choose investment options like SGBs for tax efficiency : There are several gold based investment options that can help save on tax, one of them being Sovereign Gold Bonds (SGBs). Although the interest income is taxed as per the investor’s income tax slab, but these instruments do not attract any LTCG if held till maturity, which could be instrumental in saving tax and essentially maximising the returns made in the investment.
