Home / Money / Personal Finance /  4 ways to buy gold and how much income tax you pay on gains

It is important to know how gold is taxed at the time of selling. In India, you can buy gold in different forms such as physical form like jewellery and coins and other forms like gold mutual fund, gold exchange-traded funds (ETFs), sovereign gold bonds (SGB) and digital gold. It should be noted that when you purchase gold, you are charged Goods and Service Tax (GST) at 3% on the value of gold plus making charges, if any. Since India imports much of its gold, the domestic gold price tracks the dollar-denominated international gold prices closely.

According to income tax laws, capital gains on selling gold is taxed and is dependent on the form it is purchased.

Income tax on selling of physical gold

Income tax on gains is based on whether it is short term or long term. If the gold is being sold within three years from the date of purchase then it is considered as short-term, while gold sold after three years is considered as long term. Short-term capital gains on sale of gold is added to your gross total income and taxed at the income tax rates applicable to your income slab.

On the other hand, long-terms gains are taxed 20.8% (including cess) with indexation benefits. Or in other words, adjust the purchase price of gold after factoring in inflation.

Tax on gains from gold MF, gold ETFs

Gold ETF invests its corpus in physical gold, aiming to track the price of the metal passively. Gold mutual funds in turn invest in gold ETFs. The expense ratio is higher in gold mutual fund, compared with gold ETFs. Basically, the gold funds add the gold ETF expense ratio to the overall cost. So, if gold prices go up, the gold ETF’s net asset value (NAV) goes up, and vice versa.

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.

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.

Gold bonds pay interest at the rate of 2.50% per annum on the amount of initial investment. Interest is credited semi-annually to the bank account of the investor. The interest on gold bonds is taxable according to provisions of the Income Tax Act but TDS is not applicable.

Tax on digital gold

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.

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