Investing in gold is a popular choice for many in India due to its cultural significance and financial stability. Whether you choose Sovereign Gold Bonds (SGBs), gold jewellery, or Gold Exchange-Traded Funds (ETFs), understanding the tax implications of each is crucial for making informed investment decisions.
Each method of investing in gold comes with its taxes, and the returns can differ. As an investor, you must know the tax implications of each option to maximise your returns in the best way.
This blog will examine how to invest in gold and the taxes you must pay on each investment form.
Taxation of Sovereign Gold Bonds
Sovereign Gold Bonds offer tax advantages that vary based on the holding period. With tax exemption on gains after eight years and favourable rates for long-term holdings, they are structured to encourage long-term investment while considering short-term tax implications based on your income bracket.
Interest-Income Taxation
The interest you earn from Sovereign Gold Bonds (SGBs) is added to your total income and taxed according to your income tax slab. It is classified under “Income from Other Sources.”
Capital Gains Tax on Redemption
Investors who retain their SGBs for eight years can enjoy tax exemption on any capital gains accrued. This makes SGBs an excellent option for investors to hold onto their investment for long.
Sale Before Maturity
If you decide to sell your SGBs before the 8-year maturity period, the taxation depends on how long you have held the bonds:
Long-term Capital Gains: If you sell your SGBs after three years but before eight years, the profit is considered a long-term capital gain. This gain is taxed at 20% and has the benefit of indexation, which adjusts the purchase price for inflation.
Short-term Capital Gains: If you sell your SGBs within three years of purchase, the profit is considered a short-term capital gain and is taxed according to your income tax slab rate. This means the tax rate can vary depending on your total income for the year.
By understanding these tax rules, you can better plan when to sell your SGBs to minimise taxes and maximise your returns.
Taxation of Gold Jewelry
The taxation of gold jewellery in India now revolves around capital gains upon sale, depending on how long you hold it—favouring longer-term holdings with lower tax rates—and has excluded wealth tax since its abolition in 2015, simplifying ownership considerations.
Wealth Tax Implications
Gold jewellery is no longer subject to wealth tax, as wealth tax was abolished in 2015. This change has simplified the tax considerations for owning gold jewellery.
Capital Gains Tax on Sale
When you sell gold jewellery, the tax you pay depends on how long you have held it:
Long-term Capital Gains: If you have held gold jewellery for over three years, any profit you make from its sale is considered a long-term capital gain. This is taxed at 20% with indexation benefits, which adjust the purchase price for inflation.
Short-term Capital Gains: If you sell gold jewellery within three years of purchasing it, the profit is considered a short-term capital gain and is taxed according to your income tax slab rate.
Inheritance and Gift Tax
If you inherit gold jewellery, you don’t have to pay any tax when you receive it. But if you sell the inherited jewellery later, you’ll have to pay capital gains tax depending on how long you’ve held it.
Also, if you receive gold jewellery as a gift and its value is more than Rs. 50,000 in a year, it will be taxed as “Income from Other Sources.”
Taxation of Gold ETFs
Investing in Gold Exchange-Traded Funds (ETFs) offers tax advantages linked to the duration of ownership. Longer-term holdings benefit from lower tax rates on capital gains, while dividends, if received, are taxed based on income slab rates, making Gold ETFs a tax-efficient option for gold investment in India.
Dividends Taxation
Dividends from Gold Exchange-Traded Funds (ETFs) are added to the total income and taxed based on your income tax slab. However, most gold ETFs do not pay dividends and focus instead on capital gains.
Capital Gains Tax on Sale
When you sell Gold ETFs, the tax treatment depends on the holding period:
Long-term Capital Gains: If you hold Gold ETFs for over three years, any profit is considered a long-term capital gain and is taxed at 20% with indexation benefits.
Short-term Capital Gains: If you sell Gold ETFs within three years, the profit is considered a short-term capital gain and is taxed on the basis your income tax rate.
Gold Investment Comparison
| Investment Type | Tax Treatment | Liquidity & Convenience | Potential for Capital Gains | Wealth Tax | Inheritance/Gift Tax |
| Sovereign Gold Bonds (SGBs) | Tax-free capital gains after eight years | Moderate | High | No | Taxable if exceeds Rs. 50,000 annually |
| Gold Jewelry | 20% long-term capital gains tax with indexation; Income slab rates for short-term gains | Low | Moderate | No | Taxable if exceeds Rs. 50,000 annually |
| Gold ETFs | 20% long-term gains tax with indexation; Income slab rates for short-term gains | High | High | No | No |
Conclusion
Choosing the proper form of gold investment requires a clear understanding of tax implications. Sovereign Gold Bonds offer tax exemptions on long-term gains, while gold jewellery and ETFs are subject to capital gains tax based on holding periods.
Each investment type has its benefits and considerations, making it essential for investors to evaluate their financial goals and tax circumstances before deciding. Understanding these allows you to make more informed choices and potentially enhance your investment returns
FAQs
A: Yes, Gold ETFs are taxable in India. If you hold Gold ETFs for more than three years, the gains are considered long-term and are taxed at 20% with indexation benefits. If you sell them within three years, the gains are short-term and are taxed according to your income tax slab rate.
A: Sovereign Gold Bonds (SGBs) are taxed in two ways. The interest you earn is added to your income and taxed at your income tax rate. If you hold SGBs for the full 8 years, the capital gains are tax-free. If you sell them before 8 years, long-term gains (after 3 years) are taxed at 20% with indexation, and short-term gains (within 3 years) are taxed at your income tax rate.
A: Gold ETFs and Sovereign Gold Bonds differ in taxation, interest, liquidity, and benefits. If held to maturity, Sovereign Gold Bonds offer tax-free capital gains and provide annual taxable interest. In contrast, Gold ETFs are subject to capital gains tax based on the holding period and typically do not pay dividends. Gold ETFs offer higher liquidity as they can be traded on stock exchanges, while SGBs have a fixed maturity period of 8 years. Both investments offer indexation benefits for long-term gains if held for over three years.
A: No, Sovereign Gold Bonds are not eligible for tax deductions under Section 80C. However, the interest earned from SGBs is taxable, and the capital gains on redemption after the full tenure of 8 years are tax-free.
A: The taxation of gold jewellery in India depends on the holding period. If you sell gold jewellery after holding it for over three years, the gains are considered long-term capital gains and are taxed at 20% with indexation benefits. If you sell it within three years of purchase, the gains are treated as short-term capital gains and are taxed according to your income tax slab rate. Additionally, if you receive gold jewellery as a gift and its value exceeds Rs. 50,000 annually, it is taxable as “Income from Other Sources.”
