Taxation of Physical Gold, Paper Gold & Gold Derivatives in India

In the current market, gold has become a hot topic of discussion, particularly as it recently reached a lifetime high. There’s even speculation among experts that we might witness gold reaching a significant milestone of 1 lakh for 10 grams in the upcoming financial year. Views on this vary, but one aspect that remains constant, especially in Indian culture, is the deep-rooted affection towards gold, particularly among parents or, more specifically, mothers.

In today’s age, whether it’s a religious festival, a wedding, an anniversary, or any form of celebration, it’s almost customary for Indians to consider purchasing gold. This enduring tradition persists despite fluctuations in the market. Investing in gold has consistently been a preferred choice, given its historical trend of price appreciation over the past few years, even in adulthood. However, it’s rare to find someone willing to sell their gold, even during financial hardships.

Yet, the landscape of gold investment has evolved, offering multiple avenues such as jewellery, bullion,  sovereign gold bonds, Gold ETFs, and gold derivatives. My focus here, though, is to delve into everything about gold from a taxation perspective.

Glimpse about Gold Control Act,1968

The Gold Control Act,1968 is a repealed act of the Parliament of India which was enacted to control the sale and holding of gold in personal possession. Back then, the Gold Control Act was a big deal because it gave the government control over almost every gold transaction. People had to get licenses just to buy or sell gold, and there were limits on how much you could own.

But times change, and so do the rules. The Gold Control Act was scrapped in 1990, opening up the gold market in India. Nowadays, while we don’t have those strict old laws, there are still some rules around gold. Things like taxes on gold imports, GST, and quality standards for gold jewelry are reminders of the days when gold was heavily regulated. So even though the old Gold Control Act is history, its legacy still lingers in today’s gold market policies.

Taxation on Gold:

As I said above, we can invest in gold in various forms. Briefly, we can say that below are the three categories in the gold in which we can invest :

1. Physical Gold (Jewellery, Bullion, etc.)
2. Paper Gold (Gold Exchange Traded Funds (ETFs), Gold Mutual Funds and Sovereign Gold Bonds (SGB))
3. Gold Derivatives

Before moving further, it’s crucial to highlight a fundamental aspect of taxation: the period of holding. In the case of gold, the period of holding is typically 3 years. Gold held for less than 3 years falls into the short-term category, while those held for longer are classified as long-term assets. Understanding this distinction is vital for determining tax implications and planning investment strategies effectively.

1. Taxation of Physical Gold

• For generations, physical gold in the form of jewellery, biscuits, ornaments, and coins has remained a beloved choice for Indians, symbolize both tradition and tangible wealth.
• When selling physical gold, it’s important to note that long-term capital gains are subject to a 20% tax, along with a 4% cess, effectively totaling 20.8%. Short-term capital gains, on the other hand, are determined according to the individual’s income slab.

Here are some key points to consider:

• Indexation benefit can be availed while calculating long-term capital gains, helping to adjust for inflation and potentially reducing taxes.
• When purchasing physical gold, a Goods and Services Tax (GST) of 3% is applicable. However, opting for paper gold can result in GST savings.
• One of the major drawbacks of physical gold is the need for storage and the relative lack of transactional convenience compared to paper gold.

2. Taxation of Paper Gold

• Taxation on Gold ETFs and Mutual Funds mirrors that of physical gold. However, Sovereign Gold Bonds (SGB) follow a distinct taxation system.
• Profits from selling units of ETFs or mutual funds are considered capital gains.
• Like physical gold, long-term capital gains from ETFs and mutual funds are taxed at 20.8%, while short-term gains are subject to the individual’s income slab.
• Opting for Sovereign Gold Bonds offers an additional benefit of earning 2.5% interest annually. This interest income falls under the category of “income from other sources” and is taxed according to the individual’s income slab.
• Returns obtained upon maturity of SGBs are entirely tax-free.
• Most SGBs come with a lock-in period of 5 years. If you decide to sell before maturity, any returns are treated as long-term capital gains.
• Direct Investment in SGBs is not allowed for Non-Resident Indians.
• TDS provisions are not attracted to the interest earned from SGB’s.

3. Taxation of Gold Derivatives

• One more option for investment in gold is gold derivatives for the investors. Gold derivatives with gold as the underlying asset. Investment in derivative contracts through the commodities market attracts tax similar to the commodities F&O trading tax rate. “Income from such derivatives is termed as non-speculative business income, allowing investors to claim an expense against the income generated.
• In this scenario, investors have the option to opt for presumptive taxation, as provided for under Section 44AD of the Income Tax Act, 1961.

Taxation on Gold Received as a Gift or an Inheritance

• The majority of individuals possess some amount of physical gold, often inherited or received as gifts from family members. There is no tax implication under income tax upon inheritance or receipt of gold from blood relatives. However, upon selling, one becomes liable to pay capital gains tax on it.
• To calculate the capital gains on gold, you need to determine the cost of acquisition. The cost of acquisition in the case of gold received as a gift or an inheritance is the cost of acquisition of the parent or relative from whom it has been inherited/gifted. It means that you need to consider the cost of the previous owner while taking the benefit of indexation.
• If the person from whom such gold was received as a gift or an inheritance had originally purchased the gold before 1 April 2001, there is an option to consider the fair market value (FMV) as on 1 April 2001, instead of the actual cost of the said gold.
• However, in case a gift is received from a non-relative and the value is more than ₹50,000, then it will be taxed under the head of ‘Income from other sources’.

Taxation of unexplained  Gold: Section 69A and 115BBE of Income Tax Act

The Income Tax Act of 1961 contains another critical provision, Section 69A, which becomes particularly relevant when examining the tax implications of gold under the broader scope of income tax. Section 69A specifically addresses unexplained money, bullion, jewellery, and similar assets owned by any taxpayer. When an assessee or taxpayer claims ownership of such jewellery/bullion but lacks evidence of their inclusion in his/her books of accounts or fails to substantiate ownership through credible means, Section 69A comes into play.

Under Section 69A, the assets (i.e., gold) are subject to taxation as per the provisions of Section 115BBE of the Income Tax Act. This section imposes an effective tax rate of 78%, comprising a 60% tax component along with a 25% surcharge and a 4% cess.

Exemption on LTCG of Gold:

Facing a flat 20% tax on long-term capital gains from gold investments may seem like unavoidable. However, investors have one option to evaluate to reduce their tax liabilities which is as below:

Under Section 54F, one option is to reinvest your LTCG into a residential property, provided all conditions of this section are met. By doing so, you can enjoy complete tax exemption on your earnings.

Schedule AL Reporting in ITR related to Gold:

• Individuals and HUFs with an annual income exceeding Rs 50 lakh must mandatorily file Schedule AL. Also, individuals and HUFs carrying on any business or profession are required to file details of assets and liabilities through a Balance Sheet.
• Schedule AL enables a taxpayer to disclose assets and the corresponding liabilities in the ITR filed by the taxpayer. The values of the assets and liabilities standing at the end of the year are required to be disclosed in the schedule AL.
• Hence, individuals/HUFs subject to Schedule AL must also report gold holdings within this schedule. It’s crucial to note that failure to report gold holdings in the preceding financial year before a sale could trigger higher tax assessments and potential scrutiny or re-assessment by the assessing officer.

Therefore, individuals and HUFs should ensure accurate reporting in their ITRs before any gold transactions to avoid potential tax implications.