Know income tax implications on sale of gold

Gold prices soared to new record highs as investors sought safe haven due to health of the global economy ravaged by the COVID-19 pandemic. Gold is a unique asset – highly liquid, yet scarce. It is a luxury good as well as an investment. There are many ways to buy gold. Different products can be used to achieve a variety of investment objectives.

Some investment options in gold are:

Buying physical gold – Small bars and coins accounted for approximately two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for bars and coins has quadrupled since the early 2000s.

Buying gold-backed ETFs – Physically-backed gold exchange traded funds(ETFs), exchange traded commodities (ETCs) and similar funds account for approximately one-third of investment gold demand.

Buying into allocated gold accounts – Bullion banks offer their institutional or high net-worth customers allocated gold accounts consisting of gold deposits and resembling currency accounts. The holder of an allocated account is the legal owner of a specific quantity of gold. Bullion banks also offer unallocated accounts. In an unallocated account, a customer does not own specific bars or coins, but has a general entitlement to a set amount of gold. The investor is not the legal owner of any physical gold, but rather is a creditor of the provider.

Internet Investment Gold – An increasingly common way of accessing the gold market is Internet Investment Gold (IIG). Internet Investment Gold allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise. Internet Investment Gold offers investors a highly convenient way to benefit from outright ownership of physical gold.

Buying gold derivatives: futures, forwards and options – Investing in derivatives requires more knowledge of financial securities than other forms of investing and may not be suitable for all investors. Derivatives trade over-the-counter (OTC) and on exchanges. Derivatives traded on exchanges settle in a central clearing house that matches buyers and sellers. OTC derivatives are bilateral contracts that have more flexible structures but include additional counterparty risk.

Sovereign Gold Bond – The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to offer investors an alternative to own gold. It belongs to the debt fund category. SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

Gold bonds pay interest at the rate of 2.50% per annum and this interest is entirely taxable as per your tax slab. No tax is deducted at source.

Buying gold mining stocks – Investors can invest in shares of gold mining companies. Gold mining company stocks may correlate with the gold price. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold.

What are the income tax implications of selling gold investments?

The profits from the sale of gold bars, jewelry, coins, ETF, etc. attract income tax under capital gain. The taxation rules depend on the form of gold redeemed. Let us learn about the income tax implications on the sale of gold in this article.

Sale of Physical Gold

The taxation for this form of gold depends on how long you held the gold jewelry or coins.
Long term capital gain is applicable if the gold is sold after 3 years from the date of purchase.
Short term capital gain is applicable if the gold is sold before 3 years from the date of purchase.
The long-term capital gain is taxed at the rate of 20%, while short term capital gain is taxed as per the applicable tax slab.
If the gold is received as a gift, then it will be taxed if the value of gold received during the financial year exceeds Rs 50,000.
In case of sale of gold received as gift or inheritance, the applicability of long term and short-term capital gain is determined based on the combined holding period.

Sale of Gold ETF’s

Capital gains on sale of gold funds and gold exchange traded funds (ETFs) also follow the same taxation rules as that of capital gains of physical gold.
Long term capital gain is applicable if the gold ETF is sold after 3 years from the date of purchase.
Short term capital gain is applicable if the gold ETF is sold before 3 years from the date of purchase.
The long-term capital gain is taxed at the rate of 20%, while short term capital gain is taxed as per the applicable tax slab.

Sale of Digital Gold

Digital gold or smart gold is a comparatively new concept.
Many mobile wallets such as Paytm, Google Pay, and PhonePe have tied up with MMTC-PAMP or Safe Gold to sell gold, starting from a minimum value of Re 1, to its customers.
Capital gains on sale of digital gold is also taxed just like physical gold or gold mutual funds or gold ETFs.

Sale on Sovereign Gold Bonds

The interest on Sovereign Gold Bonds is taxable as per the IT Act, 1961.
In the case of SGB redemption, the capital gains tax applicable to an individual is exempted.
Long-term capital gains generated are provided with indexation benefits to an individual or when transferring the bond from one person to another.
SGBs come with a maturity period of eight years, with an early exit option from the fifth year.
In case you exit earlier (before maturity), via the secondary market, capital gains tax will be applied similar to what is applicable for physical gold or gold mutual funds or gold ETFs.

Investing in gold funds is an intelligent way to take exposure in gold. But at the same time, one needs to understand that fund value may fluctuate and there are no guaranteed returns on investment. Choose a fund only after you are convinced about its growth potential.

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