Taxation of gold and gold products

After my article on how much gold you can keep readers have requested me to write on taxation aspect of profits on sale of gold and its variants. Let us discuss Taxation of gold and gold products.

Article discusses Basic aspects of taxation of gold, Taxation of gold purchased, Taxation on sale of gold received by inheritance or gift, Taxation of Gold Exchange Traded Fund (ETF), Taxation under gold monetisation scheme, Taxation of sovereign gold bonds (SGBs) and Taxation of Digital Gold.

There are many avenues through which one can invest in gold. The major mediums are jewellery, gold coins, gold ETF, Sovereign Gold Bonds (SGB), and Gold Deposit Certificates (GDC). The profits on these products are taxed differently. For the purposes of taxation, we can divide the products into two categories. In the first categories are gold products like jewellery, gold coins and gold ETF and the other category comprises of SGB and GDC . Let us examine the tax implications of both the categories of gold products.

Tax on physical gold, Gold ETF and gold mutual funds units

The investments in gold products of the first category are treated as capital asset under the income tax laws so any gains realised over its acquisition cost is taxed under the head “Capital Gains”. However, those who deal in gold as jeweller or bullion traders, the same gets taxed as business profits in respect of their investments in gold/jewellery for business purposes. However, the gold jewellery and gold coins held by these persons as personal investments are treated as capital assets only like other taxpayers. The rate at which your profits on gold products gets taxed depends on the period for which you have held the investments. In case the product is sold after 36motnhs the profits are treated as long term capital gains and taxed at the flat rate of 20% after applying the cost inflation index to the cost of acquisition. In case these are sold within 36 months, the gains are treated as short term capital gains and taxed at the slab rate applicable to you.

Since many of us get the gold jewellery as gift or as inheritance, the cost for the purpose of computing capital gains is taken the cost of purchase for the previous owner who had paid for it. The gift of jewellery received at the occasion of marriage, from certain specified relatives and the one inherited are fully tax free at the time of its receipt. But gift of jewellery from other person are exempt only as long as aggregate of all the gifts in any form received by you during the year does not exceed fifty thousand rupees. Once the aggregate of all the gifts from all the sources excluding the above gifts crosses the magic figure of fifty thousand rupees whole of the value of gifts received by you becomes taxable in your hands. Though the gift from relatives, on the occasion of marriage and as inheritance are fully tax free in your hands but you will have to pay capital gains tax as and when you sell such jewellery in future. For computing the capital gains in such special cases the holding period for capital gains is computed with reference to the period from the date when it was bought by any of the previous owners. For example, for the gold jewellery gifted to you by your mother which she had received from her father at the time of her marriage and which was purchased by your grandfather for Rs one lakhs, then Rs. one Lakhs shall be taken as your cost of acquisition for you at the time of sale. In case the jewellery was bought before April 1, 2001, the market value as on 1^st April 2001 is to be taken as your cost and which is to be further increased by applying the cost inflation index. As per the explicit language of the law, the indexation benefit in case of jewellery received by as inheritance/ gift is available only from the year in which you actually received it. However, few of high courts have allowed the benefit of indexations from the year in which the previous owner who had in fact bought it for a consideration.

Investments in gold saving funds as well as gold ETFs are treated on par with regular god and therefore the holding period, tax rate and exemption available are also identical to that of physical gold as discussed in the preceding para.

Taxation of SGB and GDC

The GDC issued against tender of gold under the Gold Monetisation Scheme 2015 are not capital asset under the income tax laws therefore the appreciation in value during its tenure are fully tax free on redemption/ maturity of such deposits. The interest which you received against these certificates is also exempt from income tax. However, the interest paid by the government on your SGB, which is also part of the gold monetisation scheme, is to be included in your income and gets taxed at your slab rates. The appreciation in value of SGB at the time of its redemption is tax free but if you sell these bonds in open market the profits made will get taxed as capital gains ; short term or long term depending on the holding period. The exemption at the time of redemption is available whether you have originally applied for the SGB or have purchased in the open market regardless of the holding period.

How can you save on such long term capital gains

In case you have long term capital gains on sale of any of the above gold products, you can avail exemption under Section 54F provided you invest the sale consideration in buying or constructing a residential house within specified period under Section 54 F of the Income Tax Act. In case you do not invest the full consideration, the exemption will get reduced proportionately.

I am sure by now you have fully understood the tax implications of investing in various gold products. In my opinion if you wish to just invest in gold for long period to take benefit of appreciation in its price, SGB offers you tax efficient avenue of doing so.

Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on twitter.

(Republished with Amendments)