Tax on gold investments

Gold is India’s most wanted investment as well as inheritance. Gold is bought in 3 ways- physical form like a coin, bullion or jewellery, as paper gold like gold exchange-traded funds, gold funds or sovereign gold bonds and in the digital form. Many banks and mobile wallets like Paytm and Phone Pe offer digital gold. Let’s understand how various forms of gold  are taxed?

How is physical gold taxed?

Jewellery or coins are the traditional and one of the standard ways of buying gold in India. Gold in physical form  attracts 20% long term capital gains Tax (LTCG ) + 4% cess if sold after three years of holding. Indexation benefit is available for LTCG. But if the gold is sold within three years then you will have to pay a short term capital gains tax (STCG). The gains will be added to your gross total income and taxed according to the applicable tax slab.

Tax on Gold ETF’s and Gold Mutual Funds

Gold ETFs and Gold Funds have also become popular means of investment in gold. When you invest in paper gold such as gold ETF’s or gold mutual funds, you don’t touch or feel the gold but hold them in paper format. So, in appearance, they are just opposite of physical gold, but in taxation they are alike. If you redeem it in less than three  years, the gains will be considered short term gains you will be taxed as per he applicable tax slab. If ETF or fund is sold after a holding period of three years or more then a long-term capital gains tax at 20% plus 4% cess with indexation benefits will be applicable.

Tax on Digital gold

Gains for digital gold is also on the lines of physical and paper gold. If held for more than three years then LTCG tax is applicable. And if sold before the completion of three years, STCG tax needs to be paid.

Tax on Sovereign Gold Bonds

Pankaj Mathpal, Founder of Optima Money Managers, says ‘’Among all the forms of gold, Sovereign gold bonds (SGB) takes the cake when it comes to post-tax returns. The gain from bonds are not taxed on redemption after five years and also on maturity.’’ Investors get two benefits when they invest in SGB — first, the return linked to gold price momentum plus an annual 2.5% interest. SGB comes with a maturity period of eight years, but you do have an option of redemption even after five years. If SGB is held for its full tenure and redeemed at the end of eight years then capital gains are not taxable at all.

Similarly, if you exit after five years then also you are saved from tax liability. But if you exit from SGB before the completion of five years, then you will be taxed as per the three-year rule. SGB sold in secondary market between the first year and the third year will attract STCG tax as per the income tax slab whereas if sold after three years but before the completion of five years then be ready to pay LTCG tax. The interest earned on SGB is taxed as per the applicable slab rate of the individual.

Should you invest in gold?

CA Gauri Chadha says “Gold and stock markets have an inverse relationship. Therefore at the time of economic uncertainity stock markets crash and gold rises. To have a balance in the portfolio you should add gold to it.”

If you do invest in gold then the thumb rule should be to hold it for a three year horizon to minimise the tax burden.