Explore the tax implications of converting physical gold to Electronic Gold Receipts (EGRs) in India, with insights on the latest Budget 2023 amendments. Discover how to invest in EGRs and the significance of the government’s move.
This article delves into the rising interest in digital gold as a form of investment among Indian investors. With the recent announcement of no capital gains taxation on the conversion of gold to electronic gold receipts (EGRs), we explore what EGRs are, how to invest in them, their tax implications, and the significance of the government’s latest announcement. Join us as we address these queries and shed light on the evolving landscape of gold investment in the digital era.
Indians love gold and that is no secret. We ranked the highest among all other nations when it comes to the consumption of this shiny metal. Gold has long remained a symbol of wealth and prosperity in society and for the right reasons, it is a hedge against uncertainty, a highly liquid asset that can be converted to cash instantaneously.
With the integration of technology in almost all aspects of our lives, digital gold is a new form of investment that is catching the eyes of investors, and with the announcement of no capital gains taxation on the conversion of gold to electronic gold receipts (EGRs) in the Budget 2023, makes one wonder:
1. What are EGRs?
2. How can they invest in EGRs?
3. How are EGRs taxed?
4. And what does the recent announcement of no capital gains on conversation mean to the investors?
Let’s try to address these queries one might have in this article.
EGRs are a form of Depository gold receipts that can be traded on stock exchanges. They are similar to shares and are kept in a Demat account, it is a substitute for actual gold which is kept in vaults. Investors wishing to invest in EGRs can do so by using their Demat account they have opened with a broker registered with the Securities Exchange Board of India (SEBI).
Investors can buy or sell EGRs the same way they buy and sell stocks from stock exchanges. If the investors want to convert their physical gold to digital they can do that by depositing their gold at the designated delivery center. After it is sourced, a depository receipt is created for trading on the stock exchange, and now the investors are free to trade their gold on the exchange!
The tax rate on the profit gained on buying and selling of EGRs is still in the grey and requires further clarification from the government authorities. The profit can be constructed to be liable to be taxed at the rate of 10% on the gain over one lakh if it is held for a period more than a year, if the same is held for a period less than a year it would be liable to tax at the rate of 15%.
Another conservative perspective on this matter could be that EGRs are liable for tax at the rate of 20% with the benefit of Indexation (Indexation is applied to give the investors the benefit of inflation over the years and tax their returns fairly) if it is held for a period more than 36 months, if they are held for a period shorter than that, they would be liable to tax at the individuals’ applicable tax slab rate.
In the Budget 2023, the finance minister has proposed to further facilitate digitalization. Investors converting their physical gold to EGRs will no longer to be liable to pay capital gains tax!
Previously, there was ambiguity in this regard, where the conversion of physical gold to EGR could fall under the definition of “transfer” as per the Income Tax Act (ITA) and capital gains could have been attracted on such conversion, but with this amendment, the Finance Minister has put our minds at ease by inserting a new clause in the section which specifically states that such transfer of asset will not fall under the category of transfer and will not be liable to tax.
Another question that might come to the minds of investors is, what would the cost of acquisition be in this regard?
As per the amendments in the provisions of ITA, when gold is converted to EGRs the cost of acquisition shall be deemed to be the cost of gold in the hands of the investor at the time of such conversion in whose name the EGR is issued, and the holding period for calculating capital gain shall include the period for which the Gold was held by the investor before conversion into EGR and similarly the holding period for capital gain shall also include the period for which the EGR was held by the investor before conversion into the Gold.
For example,
An investor bought 10 grams of physical gold from the market at INR 30,000 in the year 2013 and in the year 2023, they wish to convert the same into EGR. They can now go to a SEBI-registered entity and meet a vault manager who would help them with such conversion. Now, at the time of conversion in 2023, the cost of acquisition of gold would be INR 30,000 the price at which the investor bought gold initially and the period of holding spanning the entire 10 years before such conversion.
With this amendment, the government has simplified the process of calculation of capital gains, cleared any doubts one might have when it comes to calculating the period of holding, and has given the real benefit of indexation to the investors.
All these steps taken by the Finance Minister makes EGR a lucrative form of investment with minimal risk. EGRs, provide investors the same advantages of holding physical gold without having to worry about the security of the storage or having to verify its quality. And they can now easily trade the same over the stock exchange.
Although the landscape of investing in gold has predominantly been physical, this traditional form of investing is witnessing a rapid change, with the SEBI setting up an entire detailed regulatory framework for trading in gold on existing stock exchanges. Coupled with the government’s recent amendments, and rapid digitalization of our financial sector digital gold can now add shine to our all investment portfolios!
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