Buying gold? Know the income tax rules3 min read . Updated: 25 Oct 2019, 12:17 PM IST
- Remember that the income tax aspect can affect your net return from gold
- Capital gains tax on gold is dependent on the form it was purchased and time period it was held
Buying valuables like gold and silver on occasions like Dhanteras is considered auspicious in India. This year buyers have another option: sovereign gold bonds, which are currently open for subscription. Many jewellers have also rolled out promotional offers to attract buyers. Stock exchanges NSE and BSE will extend the trading session for gold ETFs and sovereign gold bonds till 7 pm today on the occasion of Dhanteras. After the normal market hours of 9:15 am to 3:30 pm, trading in gold ETFs and SGBs will resume at 5 pm and continue till 7 pm, the exchanges said.
"You can have gold in your portfolio as insurance, but how much? 5-10% is the maximum. I think more than this percentage would be a wrong choice. If you are investing in gold for other reasons like your daughter’s marriage then it’s completely fine; otherwise, too much investment in gold is a wrong choice," says Ramalingam K, founder and CEO at Holistic Investment Planners.
Also, investors should be aware of income tax implications of different forms of gold in case they sell it in the future.
Capital gains tax on gold is dependent on the form it was purchased. Also, it depends on the time period the asset is held. If gold is being sold within three years from the date of purchase, then it is considered as short-term. Otherwise, it is considered as long term.
Long-term and short-term capital gains tax
Short-term capital gains on sale of gold is added to your gross total income and taxed accordingly. Long-terms gains on sale of gold is taxed at 20.8% (including cess) with benefit of indexation. The purchase price of gold is adjusted after factoring in inflation.
Tax on sale of physical gold
Gains from sale of physical gold such as bars, coins or jewellery within three years from the date of purchase is considered as short-term capital gains and taxed accordingly. After three years, gains are considered long-term capital gains (LTCG).
Income tax on gains from gold ETFs, gold mutual funds
Gold ETFs are securities that track the metal's prices and they are traded on stock exchanges. Gold mutual funds or MFs in turn invest in gold ETFs. Gains from sale of gold ETFs or gold MFs are taxed similarly to that of physical gold.
Sovereign gold bonds
These are government securities denominated in grams of gold. They are issued by RBI 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.
Moreover, if you hold the investment till maturity, any capital gains are exempt from tax. This benefit is not available in other instruments like gold ETF or gold funds.
Gold bonds pay interest at the rate of 2.50% per annum on the amount of initial investment. The interest on gold bonds is taxable but TDS is not applicable.
Though the gold bonds mature after eight years, there are exit options after the fifth year. You can also trade gold bonds on stock exchanges within a fortnight of issuance, and exit. In case you exit before maturity, you will get indexation benefit while calculating long-term capital gains.
"Gold bonds offer a superior alternative to holding gold in physical form because it frees the investor from bearing the risks and costs of storage. Investors are assured of the market value of gold at the time of maturity and periodical interest. Gold bonds are free from purity issues and making charges which are incurred when gold is held in jewellery," says Ramalingam K.
Besides that bonds carry sovereign guarantee both on capital invested and the interest, he said.
GST is not levied on sovereign gold bonds, making this scheme further cost-effective. Otherwise, GST at 3% is levied on gold purchases.