There are many avenues through which one can invest in gold. The major mediums are jewellery, gold coins, gold ETF and Sovereign Gold Bonds (SGB). 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. 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 this 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. However, the 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 24 months the profits are treated as long term capital gains and taxed at the flat rate of 12.50% without applying the cost inflation index to the cost of acquisition. In case these are sold within 24 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 of such gold jewellery is taken the cost of purchase for the previous owner who had paid for it for computing capital gains. 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 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 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 ₹1 lakhs, then ₹1 lakh 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 1st April 2001 is to be taken as your cost.
Investments in gold saving funds become long term after 24 months whereas the same would become long term after 12 months in case of . The 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 interest paid by the government on your SGB 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 for individual tax payer till 31st March whether bought from the market or originally subscribed. If you sell these bonds in open market the profits made will get taxed as capital gains ; short term if sold within 12 months and long term if sold after 24 months.
As per the budget proposals the the exemption at the time of redemption will be available only to the individual investor who has originally acquired the SGB and have redeemed at the end of the tenure of eight years. So the exemption is not available to the original subscriber if redeemed any time after five years but before eight years.
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 for acquiring a residential house within specified period. In case you do not invest the full consideration, the exemption will get reduced proportionately. This exemption is available only if you do not own more than one residential house property on the date of sale of the gold product.
Balwant Jain is a tax and investment expert. Views expressed are personal