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Planning to invest in gold? Know income tax rules for investing in physical, digital, paper gold

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There are various forms of gold where one can invest. Besides physical gold, digital gold and paper gold are also in demand nowadays. Before investing in any form of the yellow metal, the investor should know about the tax liabilities related to gold investment.

Tax on sale of physical gold 

Gold is often bought as a physical form, mainly jewellery. Other than jewellery, physical gold also consists of bars and coins. Gold coins are usually bought in the denominations of 5 or 10 grams. All types of physical gold are hallmarked. 

As per the Income Tax Act, the sale of physical gold attracts capital gains tax. Archit Gupta, Founder & CEO Clear said that capital gains are taxable based on the type of gain, whether long term capital gain or short term capital gain. If you are holding gold for more than 36 months before the date of sale, it is a long-term capital gain. Otherwise, it is a short-term capital gain, and tax will be payable accordingly.

“You can take indexation benefit on the cost of acquisition of physical gold to derive the value of long-term capital gain. Such gain is chargeable to tax at 20 per cent plus a cess of 4 per cent on the income tax amount. Hence, the total tax will be 20.08 per cent. However, if you have sold the gold within a short period, i.e. before the expiry of 36 months from the date of purchase, include such short-term capital gains in your gross total income and compute tax on total taxable income according to the regular tax bracket,” Gupta explained.

Tax on sale of digital gold 

Simply put, digital gold is a mode of investing in physical gold. It is just like the regular gold, can be bought online and is stored in insured vaults by the seller on behalf of the customer. However, it is not regulated by any government body such as SEBI or RBI.

The tax treatment on digital gold is the same as that applicable to physical gold, said Archit Gupta.

Tax on sale of Sovereign Gold Bonds

Sovereign Gold Bond (SGB) is a form of digital gold which is backed up by the Government of India. The RBI issues the Sovereign Gold Bonds on behalf of the government. SGB was introduced in November 2015. As SGBs are backed up by RBI they are considered a safe option because of which SGBs have seen a drastic increase among the investors. The investor receives interest at the rate of 2.5 per cent per annum on a half-yearly basis.

Tax implications on the sale of SGB are as follows:

Redemption of SGB on maturity

Any gain on gold bonds redeemed after eight years, i.e. on maturity, is exempt from tax.

Early redemption after five years

Any gain on the sale of SGB after five years shall be a long-term capital gain. And 20 per cent tax is chargeable on such long term capital gain after indexation.

Sale of SGB through the stock exchange

Any gain on the sale of SGB through the secondary market is taxed based on long term or short term capital gain. If the SGB is sold within 36 months of purchase, then tax is paid based on the normal tax slab of the individual. Otherwise, a long-term capital gain is taxed at 20 per cent and 4 per cent cess.

Tax implications on the sale of ETFs, Mutual Funds

As per Archit Gupta, the sale of other paper gold investments such as mutual funds and Exchange Traded Funds (ETFs) is taxed similar to that of physical gold.

 

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