ITR deadline approaching: Know tax compliance of gold-related investments

September 30 is the last date of filing income tax return for the fiscal year 2020-21, which means there are only several days left to wrap up the compliance process. These days almost everybody has some investment in gold, be it in physical or digital form. Every individual should declare his/her investment in gold while filing the ITR. Gold is always considered a safe bet. So, depending on your chosen mode of gold investment, you must know the rules for IT returns. For instance, people investing in gold via gold bonds will bear different tax liabilities compared to those opting to purchase physical gold.

Physical gold

The most common medium of investment of gold is physical gold. In an Indian family inheritance of physical gold in the form of jewellery or coins is common. Short term capital gains and long-term capital gains might be applicable.

For short-term capital gains tax to be applicable, the investor needs to sell the gold within 36 months of buying or possessing them. Also, the return from a gold sale is added to the investor’s annual income and taxed as per his/her applicable income tax slab rate for short term capital gains.

In the case of long-term capital gains, a person needs to pay 20% of the total valuation as income taxes. There is an additional 4% cess.

Long-term capital gains will be applicable if gold is sold more than three years later. The tax will be on the proceeds of the sale, irrespective of whether one makes a profit or loss.

Digital gold

Digital gold investment is treated in the same manner as physical gold. Digital gold is the latest mode of investment that has recently become popular. Investment in digital gold can be done through different mobile wallet apps, and bank apps. The minimum value of the gold that can be purchased is Re 1.

Long-term capital gains from digital gold is taxed at 20% on returns, along with 4% cess and surcharge. If digital gold is held for less than 36 months, returns are not taxable directly.

SGB and ETF

Passive gold investments include mutual fund, exchange-traded funds (ETFs) and sovereign gold bonds (SGBs). In all these modes, gold is held virtually and not physically.

Taxation on mutual fund and gold ETFs is similar to that of physical gold. On the other hand, returns from sovereign gold bonds are taxed differently. For instance, investment through gold mutual funds or ETFs is taxed at 20% plus 4% cess for long-term capital gains.

On the other hand, in sovereign gold bonds, investors earn an interest of 2.5% per year, which is categorised as income from other sources and taxed accordingly to the tax bracket of the taxpayer.

Also, returns of the investor after 8 years of SGBs investment will be completely tax-free. Usually, sovereign gold bonds come with a minimum lock-in period of 5 years, and if the holdings are sold at any point after this time and before reaching maturity, all returns from such transactions will be treated as long term capital gains. It will be taxed at 20% along with 4% cess and surcharge just like physical gold.

Bottom line

Tax experts suggest that while filing ITR everybody should declare the gold which he/she possesses.

“When you are going to file your income tax return then for the fiscal year 2020-21 by the end of this month of September, don’t forget to file your gold holdings, be it physical or digital or virtual. Otherwise, you might face penal action,” said tax expert Arvind Agarwal.