How gold as jewelry and coins are taxed?
Indians love to hold gold in physical form. The glitter of owning gold jewelry and gold coins is quite irresistible for most Indians. Although the jewelry demand for gold has fallen in the last one year due to high gold prices and COVID, the demand for physical gold is expected to return sooner rather than later. But do you know how gold is taxed?
When you hold gold in the form of jewelry or coins, it is classified as physical non equity asset. For capital gains tax calculation, gold must first be classified into short term gains / long term gains. If gold is held for more than 36 months, it becomes long term capital gain; else it is short term capital gain. Gold sold within 36 months will be treated as STCG and taxed at your applicable marginal rate of tax. So, if you are in the 34% effective tax bracket that is the rate of tax you will pay on gold STCG.
If gold is held for more than 3 years, then it is subject to LTCG tax on sale. Here there are two options. You can invest the net proceeds either in a residential property under Section 54F or in eligible bonds under Section 54EC. In such cases, the long term capital gains earned on gold is totally tax free subject to conditions. However, if you don’t reinvest the proceeds in exempt assets, then LTCG is taxed at 20% with benefit of indexation.
How indexation works in the case of LTCG on gold?
Indexation inflates cost of acquisition of gold based on an inflation index defined by the Income Tax department each year and reduces your LTCG tax payable.
|Cost of acquisition of gold (Jun-12)||Rs100,000||200|
|Sale value of Gold (Feb-20)||Rs225,000||289|
|Long Term Capital Gains||Rs125,000|
|Indexed cost of acquisition (A)||Rs.144,500||*(100,000 X 289/200)|
|Indexed Capital Gains (B)||Rs.80,500|
|Tax a@20% on 80,500||Rs16,100|
|Effective Tax Rate||12.88%|
What if I did not purchase the gold?
What if the gold was received by inheritance or gift? Firstly, any gift of gold above Rs.50,000, other than from close relatives, will be taxed as income. In terms of capital gains, the principle remains the same but there is confusion about what data point to consider?
The buy price must be the price paid by the original buyer. However, if the date is prior to 1981, then you can impute the 1981 price as purchase price. This is for the calculation of capital gains. For indexation, the date of transfer will be considered. However, this has been challenged in courts and there are judgments which allow full indexation benefits.
How are gold ETFs, gold mutual funds and digital gold taxed?
Any dividends on gold funds will be taxed like other dividends at your peak rate of tax. What about taxation of capital gains on gold ETFs? Gold ETFs are treated as non-equity holdings at par with physical gold. So, 3 years will be the cut off for LTCG classification. However, while physical gold will be subject to wealth tax above a threshold, gold ETFs being financial assets, are exempt from wealth tax. Also, physical gold is subject to VAT and sales tax, which is not applicable in case of gold ETFs.
Digital gold is emerging as a new and exciting way of holding gold even in small denominations. However, for tax purposes, it is the same as physical gold and gold ETFs.
Tax on Sovereign gold bonds (SGBs)
SGBs are emerging as smart substitutes for physical gold and are extremely popular. There are two streams of revenue. SGBs pay interest on the bond face value at 2.5% (subject to change). This interest is taxed like any other income. It is clubbed with total income and taxed at peak rates.
What about capital gains on SGBs? IF SGBs are redeemed at maturity (after 8 years), they are fully exempt from capital gains tax. However, SGBs also offer an exit window after 5 years. If you opt for this window, then the taxation terms are exactly like physical gold and gold ETFs.
Gold has emerged as a great portfolio diversifier. It is time to understand this asset class in post-tax terms.