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The practice of investing in gold is fairly common. Depending on their financial objectives, people invest money in various types of gold. The earliest type of gold investing is physical gold. However, there are now a variety of methods for investing in gold. Jewelry, gold coins, gold Exchange-Traded Funds (ETFs), sovereign gold bond (SGB) taxation, digital gold, and other derivatives are all options for investors. Tax treatment varies depending on the type of gold investment. Let’s examine the tax on gold investment in India.
Table of Contents
Taxation on Investments in Physical Gold
Selling actual gold will subject the seller to 20% in taxes and a 4% long-term capital gains cess.
If you know the difference between short-term and long-term capital gains, calculating taxes on buying gold is easy.
In the former, the assets must be sold within 36 months of purchase. Long-term capital gains will be recognised if you sell them at a later date.
When it comes to short-term capital gain (STCG), the proceeds from a gold sale are added to your yearly income and taxed at the appropriate income tax slab rate.
On the other hand, physical gold long-term capital gain (LTCG) investors will be required to pay 20% of the returns in taxes plus any necessary surcharges. Additionally, these transactions are subject to a 4% cess with indexation advantages. Finally, while purchasing actual gold, you would also be required to pay a Goods and Services Tax. As is clear, investing in actual gold is subject to a variety of taxes.
Taxation of Investments in Paper Gold
Sovereign gold bonds (SGB) and gold mutual funds are examples of paper gold. When investing in paper gold, the investor only has a paper copy of the real metal. The tax regulations for paper gold are listed below.
Sovereign Gold Bond Taxation
- Interest on SGBs is taxed at slab rates like Income From Other Sources (IFOS).
- Sales of SGB after eight years are not subject to tax.
- Long-term capital gains are earned on the sale of SGB after five years but before the end of eight years, and they are taxed at 20% with the advantage of indexation.
- Additionally, the tax rate on income from the sale of SGB is 10% without the benefit of indexation if the sale occurs after a year but before five years.
Gold ETFs and Mutual Funds Taxation
- Income Head – Income from capital gains is revenue from the selling of gold mutual funds or gold ETFs. It is an LTCG if the taxpayer sells gold mutual funds or ETFs after owning them for more than three years. An STCG occurs when a taxpayer sells gold mutual funds or ETFs after owning them for less than three years.
- Tax Rate – With the advantage of indexation, the taxpayer should pay income tax at slab rates on STCG and 20% on LTCG.
Taxation of Gold Derivatives Returns
When the concerned business’s annual total turnover is less than ₹2 crore, 6% of the returns are claimed as taxes.
Returns from gold derivatives can be claimed as business income, which helps reduce the tax liability associated with such transactions. You wouldn’t need to keep an accurate record of the company’s books and accounts in order to benefit from the provisions of Section 44AD of the Income Tax Act.
Your business is allowed to keep the tax expense on gold derivatives to only 6% under this hypothetical tax plan. The sole need is that the company’s annual revenue cannot exceed ₹6 crore. The total profit and loss of each transaction make up the annual turnover.
Conclusion
Although gold is a reliable investment, there are risks involved. The taxation on digital gold investments varies depending on the sort of gold you invest in. The tax on physical gold is comparable to a small number of alternative gold investment strategies. Like equities and bonds, gold is not a risk-free investment since it varies in value depending on a number of international economic variables. All investment portfolios should be diversified, and gold may achieve this, especially during market downturns when the price of the metal tends to climb.