Investing in gold is a popular choice for many individuals in India. It is the safest way to safeguard wealth and diversify the investment portfolio. Like every other asset class, gains obtained from gold are taxable. This article will delve into various types of gold investments and how to save income tax on gold.
Table of Contents
Different types of gold investments
Various types of gold an investor can invest in India are as follows –
Digital Gold: Digital gold investment is a virtual representation of a paper asset, symbolising ownership of gold, but the actual physical gold is held securely by a custodian. Nowadays, various mobile wallet applications offer the opportunity to invest in gold digitally with as little as Re. 1, thus making it accessible to a wide range of investors.
Physical Gold: Investing in physical gold remains the most traditional and widely practised method. It involves the purchase of gold in physical forms such as jewellery, bars, or coins. However, when choosing this option, it becomes the investor’s responsibility to ensure the secure storage of the gold.
Paper Gold: Paper gold can be defined as an asset that mirrors the price movements of gold but does not possess physical form. It lacks tangible backing regarding actual metal and exists solely in a theoretical realm. By owning paper gold, individuals can partake in the market’s gold value without needing physical gold.
Paper gold investments include mutual funds, Sovereign Gold Bonds (SGBs), and Exchange-Traded Funds (ETFs). This investment option provides a convenient way to gain exposure to gold without needing physical possession.
Tax exemption on gold
The profit derived from the selling of assets is called capital gains. Since gold is an asset class, it is eligible for capital gains on tax. The tax rates for selling gold assets vary based on the duration of ownership, which determines whether it falls under – long-term and short-term capital gains.
Tax on long-term capital gains: These gains are obtained when a long-term capital asset like gold, owned for more than 36 months, is sold. Individuals are liable to pay taxes on such profits. Long-term capital gains are taxed at 20.8% (rate including health and education cess @ 4%) with indexation.
Tax on short-term capital gains: Short-term capital gains arising from the sale of a capital asset held for 36 months or less. Short-term capital gains are subject to taxation based on the individual’s applicable income tax slab rates. To illustrate, if a person falls within the 30% tax bracket and earns a short-term capital gain of Rs. 6 lakh, they would be required to pay 31.20% on the Rs. 6 lakh, resulting in a tax liability of Rs. 1,87,200.
How to avoid tax on capital gains on gold?
- Under Section 54F
Section 54F of the Income Tax Act of 1961 provides a tax exemption for capital gains earned from selling assets like gold, shares, or bonds. This exemption applies if the gains are reinvested in purchasing a house. The proceeds from the sale of gold investments will be exempt from tax if used to buy a house within one year before the sale or two years after the sale. Additionally, if the proceeds are utilised for constructing a house within three years of the sale, they will be tax exempted.
- Utilising capital gains account
If capital gains cannot be reinvested within the required time frame, individuals can deposit the gains into a Capital Gains Account with a public sector bank. This allows them to save on taxes until the funds are used to purchase or construct a new residential property.
- Investing in government bonds
To waive long-term capital gains tax, one can invest the gains in specified bonds within six months of selling the gold asset. Bonds like 54EC bonds or capital gains bonds, such as those offered by the National Highway Authority of India or REC, provide tax benefits. The maximum limit for investing in 54EC bonds is Rs. 50,00,000.
- Opting for a gold loan
In situations where short-term funds are required and avoiding tax on the sale of gold is desired, a gold loan can be a suitable option. It allows borrowers to obtain funds by pledging gold, jewellery, or coins as collateral. Once the loan is repaid, the borrower can retrieve their gold asset, eliminating the need to part with it permanently.
Conclusion
While gold is valued as a secure asset, selling large quantities can be hindered by the imposition of capital gains tax. However, several ways to mitigate the tax burden include:
- Reinvesting the gains in a house.
- Tax-saving bonds.
- Utilising a capital gains account.
FAQs
What is the income tax on digital gold?
For Short-Term Capital Gains (STCG), the taxpayer must pay income tax based on the applicable slab rates, while Long-Term Capital Gains (LTCG) are taxed at a rate of 20% with the benefit of indexation.
What is income tax on a gift or inheritance of gold from a relative?
Gifting or inheriting gold in India has specific tax provisions. Gold received as a gift or inheritance from a relative is exempt from tax under Section 56(2).
As an investment fanatic, I’ve dabbled in early-stage startups, mutual funds, gold, stocks, smallcases, and real estate to identify which assets generate the highest ROI. At Tickertape, I’m dedicated to presenting my learning and providing insightful suggestions to help my readers make sound investment decision.
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