Gold is trading at Rs 22,157 per 10 grams and if you are looking at investing in the yellow metal, here’s what you should keep in mind. Investing in gold ETFs is more convenient and ensures purity of the yellow metal as compared with physical gold. What’s more, it also works out to be a cheaper transaction since it is more tax efficient than gold coins, bars or jewellery.
The income-tax factor
For taxation purposes, gold investment is categorised into two-gold ETFs and physical gold, including coins, bars, jewellery and even e-gold.
Gold ETFs are treated like debt funds in terms of tax treatment. The capital , the Securities and Exchange Board of India, broadly categorises all funds into two—equity funds and all other funds. Since ETFs are not equity funds, they fall into the second category. Accordingly, you need to pay short-term capital gains (STCG) tax as per your tax slab if you sell ETF units within a year of investing. This means you may have to pay as much as 30.9% if you are in the highest tax bracket. But if you sell the units after a year of investment, the proceeds will attract long-term capital gains (LTCG) tax at 10.3% without indexation or 20.6% with indexation.
In case of physical gold, the disadvantage is that the period for which STCG tax is applicable is three years compared with just a year in gold ETFs. LTCG tax is applicable after three years and you don’t have the option of paying tax without indexation.
The wealth tax factor
There is no wealth tax in gold ETFs, but the same is applicable on physical gold. If the value of your net gold exceeds Rs 30 lakh, you need to pay 1% of the excess value as wealth tax. The excess value does not include the amount of an ongoing loan you may have taken to procure gold.
For instance, if the value of the net gold you hold is Rs 50 lakh, but you have a loan of Rs 10 lakh to buy the metal, the value of your net gold would be Rs 40 lakh (Rs 50 lakh minus Rs 10 lakh). Accordingly, you would need to pay 1% wealth tax on Rs 10 lakh (Rs 40 lakh minus Rs 30 lakh), which comes to Rs 10,000. You need to pay wealth tax every year till the time you do not sell the same.