Where gold speaks every tongue is silent- Proverb

Gold prices are at all-time high in India & it has outperformed all other classes of investments. Surprisingly, higher prices are attracting more investor for the time tested yellow metal & it has become the most preferred choice of investment superseding real estate & share market. Not only physical, now there exist other variants like Gold Exchange Traded Fund (ETF) & Gold Sovereign Bonds. Though all of this represents investments in gold, all have different tax impact. With life time high prices, some people are even liquidating their gold holding to meet business or personal requirements as alternative fund raising options through sale of real estate or shares is not workable or feasible. Buy or sale, one needs to know its tax implications. The taxability of investment in gold depends upon the variants of gold investments as well as period of holding. Let us have a look at it.

Physical Gold, Jewellery & Ornaments

Whether self-acquired or inherited, sale of gold, Jewellery, Ornaments is liable for taxation.  Profit arising on sale is taxable under the head “Income from Capital Gain” except in case of persons who are in to the business of jewellery where it is taxable as Business income. Actual impact would depend upon the period of holding of such gold.  If gold is sold after a holding period of more than 36 months then profit on sale of it is treated as Long Term Capital Gain (LTCG), otherwise it will be considered as short term (STCG). It is beneficial to sale after a holding period of more than 36 months as (a) indexation benefit is available in such cases i.e., cost of acquisition would be enhanced to compensate inflationary effect (b) tax can be saved by claiming an exemption u/s 54F (Investing the sale proceeds in a house). [No exemption u/s 54EC towards investment in bonds of NHAI/REC is available as it is restricted to Land & Building only and not towards other capital assets.). In case the gold is not purchased by the taxpayer but the same is inherited (or is received by way of gift) then the cost & date of the previous owner is to be considered in the hands of recipient for computing capital gain. If the gold is purchased on or before 01.04.2001, then the rate as on 01.04.2001 can be adopted for computing Capital gain.

Tax Rate
 

LTCG is taxable @ 20% plus applicable surcharge and education cess. Short term capital gain is treated like any other regular income and taxable according to the applicable tax slab of the taxpayer. It may be noted that no tax liability arises at the time of receipt of gold by way of gift from the ‘relative’ or if it is received by way of inheritance. The tax liability would arise only on its sale.

Gold ETF

Gold ETFs scores higher over the physical gold as it has better price liquidity, convenience of storage, disposal & is theft-free. Even if it entails some cost; it is still negligible as compared to other benefits accruing out of it. Units of gold ETFs are treated like ‘Debt funds’ of mutual funds & taxed accordingly. As Gold ETF are not equity oriented mutual funds, LTCG on sale of gold ETF’s is not exempt from tax.  The holding period & tax rate for gold ETF are similar to that of physical gold as discussed above i.e., holding period for ETF to qualify as long term is holding for a period of more than 36 months and the applicable tax rate for LTCG is 20%. Indexation benefit as well as tax saving options u/s 54F is available for saving tax on LTCG arising from Gold ETF. STCG arising on transfer of Gold ETF is taxable at a normal rate (& not at special rate of taxation of 15% which is applicable on sale of shares through recognized stock exchange).

Gold Sovereign Bond Scheme

Sovereign Gold Bonds (SGB) is in fact a unique Government security which is denominated in grams of gold.  Physical Gold & Gold ETF are considered as passive investment as it offers only an opportunity of price rise as against investment in Gold Sovereign Bond which offers fixed interest income too (though at nominal rate).  It is one of the best options & nice substitute for Gold ETF/physical gold.  The interest on sovereign gold bonds is taxable as “Income from other source”. Capital gains arising on such bonds shall be fully exempt on maturity. However, the profits made on sale of such bonds before the redemption date shall be taxable depending on the holding period.

“Gold is money. Everything else is credit” – J. P. Morgan.

Gold is considered as profitable investments & global currency which works when all other fails. It is the best protection against inflation and represents the least risk of capital loss.