Gold prices shot up after the government in Budget 2019 proposed to increase import duty on gold and other precious metals to 12.5%, making the yellow metal and jewellery expensive in the domestic market.

Gold prices have hit new highs in India. If you are looking to cash in on higher prices, you should know the income tax implications. Apart from physical forms like jewellery, coins and bars, gold can also be held in electronic forms like gold ETFs or exchange traded funds (ETFs), gold mutual funds and sovereign gold bonds.

Income tax rules levied on sale of gold also depends on the form of gold holding and time period of holding.

Income tax rules on sale of gold

The most common form of gold holding in India is gold jewellery. It is to be noted that no income tax is levied on inheritance. But subsequent sale of the inherited gold is taxable. Tax experts suggest that proper documentation should be maintained to show that the gold was received under an inheritance.

1. Physical Gold

Profits on sale of physical gold and gold jewellery purchased by you or received under an inheritance become taxable under “capital gains“. If the gold is held for more than 36 months, profits are treated as long term and taxed at flat 20%. Else, they are taxed as short term at your slab rate.

For gold inherited from parents, the cost shall be the price they had paid to purchase the same. Further to determine the period of holding, the period for which the gold was held by them would also be considered to determine if the asset is long term (LTCG) or short term (STCG).

While calculating long-term capital gains, the seller gets the benefit of indexation. Or, in other words, the cost of acquisition is adjusted according to inflation, according to Cost Inflation index (CII) as notified by the tax authority, which helps to bring down your capital gains.

For gold that purchased by you or originally by your parent before April 1, 2001, you have the option of taking the Fair Market Value (FMV) of the jewellery as on April 1, 2001, instead of actual costs incurred to purchase the asset. The Fair Market Value can then be indexed to determine your cost of acquisition. This helps to get the benefit of indexation.

2. Gold ETFs, Gold MF

Gains from sale of gold ETFs or gold mutual funds are taxed similarly as that of the physical gold. Short-term capital gains on units held for less than 36 months is added to investor’s income and taxed according to the applicable slab rate. Long-term capital gains on units held for more than 36 months are taxed 20.8% (including cess) with indexation benefits.

3. Digital Bonds

Many banks, fintech and brokerage companies, in partnership with MMTC, offer digital gold through their apps. Investors can invest very small amount of money in gold through this route. Income tax on digital form of gold is similar to what is applicable to the physical form of gold or gold ETFs or gold mutual funds.

4. Sovereign gold bonds

These are government securities denominated in grams of gold. Or in other words, they are substitutes for holding physical gold. Investors pay the issue price and the bonds are redeemed in cash on maturity. The bond is issued by Reserve Bank of India on behalf of the Government of India from time to time.

Sovereign gold bonds come with a maturity period of 8 years, with an exit option from the fifth year. Sovereign gold bonds are also traded on stock exchanges within a fortnight of issuance, offering an early exit option for investors.

Capital gains arising from redemption of sovereign gold bonds have been exempted from tax. Also, indexation benefit is provided to LTCG arising to any person on transfer of bonds.