With prices of gold and silver having substantially appreciated over the last two or three years, many have invested a part of their portfolio in gold and silver. Some have invested in bars or coins of gold and silver, some have invested in gold exchange-traded funds (ETFs), some have acquired jewellery or silver articles, while some have acquired gold deposit bonds from banks. Of course, there are no gold mining companies of consequence in India and, therefore, investing in shares of such companies is not an option.
While each of these forms has certain advantages in terms of convenience of holding and resale value, which would normally determine the form in which one invests, one also needs to understand the tax consequences of such investments.
Physical gold, silver
As far as physical gold and silver bars or coins are concerned, these are certainly capital assets and any gains made on the sale of these are subject to capital gains tax. These assets have to be held for at least three years in order to qualify for the concessional treatment of taxation at 20% as long-term capital gains (LTCG). Any time before three years, the gains would be regarded as short-term capital gains (STCG) and would be subject to normal slab rates of taxation.
These are regarded as mutual fund (MF) units. Accordingly, the holding period for such ETFs to qualify as long-term assets is 12 months. Since these are not equity-oriented MFs, LTCG on sale of gold ETFs would not qualify for exemption from taxation, nor would STCG be eligible for the concessional rate of taxation. However, these would qualify for the concessional LTCG tax rate of the lower of 10% of the gains without indexation or 20% of the gains with indexation. Effectively, the long-term gains on sale of such ETFs would be taxed at a maximum of 10% of the gains. STCG would, however, be taxed at normal slab rates.
Gold, silver jewellery
These are not to be regarded as “personal effects”, though they may actually be meant for personal use, besides being an investment. Personal effects are normally not regarded as capital assets on account of a specific exclusion.
There is, however, a specific exclusion for jewellery from the definition of “personal effects”. Jewellery would, therefore, always be a capital asset, requiring a holding period of three years to qualify as a long-term capital asset. Here also, there would be no concessional tax treatment for gains arising on sale of jewellery and the normal LTCG rate of 20% and slab rates for STCG would apply.
Interestingly, silver articles which are not in the nature of ornaments would not be regarded as jewellery and would instead constitute “personal effects” if they are intended for the personal use of the owner. Therefore, any gains on sale of such silver articles would not be subjected to capital gains tax as they would not be regarded as capital assets. You cannot, however, buy large amounts of silver articles and claim them all to be “personal effects”. You would need to prove by your lifestyle and actual usage that such items are intended for your regular use. It is only then that you get the benefit of the exemption. If the facts show that you have really bought them as investments and not for actual use, then you cannot get exemption.
Gold deposit bonds
These are also specifically excluded from the definition of capital assets and, therefore, any gains arising on the sale of gold deposit bonds would not be chargeable to tax as capital gains, irrespective of whether the gains are long term or short term in nature. Of course, if you exchange the bonds for gold and then sell the gold, the gains that you make on the sale of gold would be taxable.
You also need to factor in wealth tax implications. Gold and silver bars and coins as well as jewellery are liable to wealth tax; the tax payable being 1% of the market value of the assets exceeding Rs 30 lakh. Such tax is payable each year on the assets so held as on 31 March of that year.
However, gold ETFs and gold deposit bonds are not subject to wealth tax at all since wealth tax is levied only on specified assets, which does not include such assets. However, silver articles would be subject to wealth tax unless they are in the nature of “personal effects” intended for personal use.
It is, therefore, clear that gold ETFs and gold deposit bonds are superior assets from the tax perspective rather than physical holding of bars, coins or jewellery of gold and silver. Of course, they also score on convenience of storage and disposal, though such convenience may entail a cost in terms of a charge.
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Gautam Nayak is a chartered accountant.