Gold investment has sentimental value for all of us. You always bought gold jewellery and coins on festival occasions. Your wife also received some gold as Stree dhan at the time of your wedding. Traditionally, you invest in gold in the form of jewellery or gold coins. Nowadays, you can invest in gold in different forms.
Apart from physical gold, digital gold, sovereign gold bonds and gold mutual funds, gold ETFs etc., are also available. Youngsters today prefer to invest in these other forms of gold rather than physical gold. For most people, gold investment is a safe option with stable returns. Returns of other assets like equity and bonds may fluctuate a lot. Gold investments are subject to a gold tax rate.
What Are the Types of Gold Investments?
You may invest in different kinds of gold investments. These include:-
1. Physical Gold like Jewellery and Gold Coins
You gain returns on this type of investment through capital appreciation in the market price of gold.
2. Digital Gold
You may invest in this type of gold through online e-wallets like Paytm, Google Pay, etc. You invest in 24-karat pure gold online. The gold is held in secure bank-grade vaults. You buy pure gold at market rates. You can make investments as low as Re 1. You can redeem at maturity either in cash or in pure gold. You pay a one-time levy of 3% GST. You can sell at any time after 72 hours. You earn returns through capital appreciation.
3. Sovereign Gold Bonds (SGBs)
These are gold bonds issued by the government. These bonds pay an interest of 2.5% p.a. Your investment in sovereign gold bonds matures after 8 years. You may redeem these bonds at maturity. You will realise the market value of gold. You do not have to pay making charges for this type of investment.
4. Gold Mutual Funds
These are mutual funds investing purely in gold. You invest and redeem at the Net Asset Value (NAV). The NAV is calculated based on the market price of gold. You need to open a Demat account to trade in gold mutual funds.
5. Gold Exchange Traded Funds (ETFs)
You can trade in Gold ETFs through a Demat account that you open, online or offline. The NAVs of the ETFs depend on the market value of the underlying gold investments. You can trade these investments like equity shares.
What Are the Different Gold Tax Rates?
The tax on gold that you pay depends on the nature of your investment. The taxation method differs depending on the underlying gold investment. The different gold tax rates are as follows:-
1. Tax on physical gold
When you sell physical gold, you pay short-term capital gains or long-term capital gains tax. If you hold physical gold for less than 36 months, you pay short-term capital gains tax. This gold tax rate is calculated according to your income tax slabs. In case you hold physical gold for more than 3 years you pay long-term capital gains tax. The long-term tax rate on gold is 20% tax of your return + surcharge at the rate which applies to you + cess at 4%.
Before this gold tax rate is calculated, indexation of the gold price from your purchase date is done. Indexation calculates the effect of changes in the Consumer Price Index between your sale date and purchase date. The appreciation/depreciation in the CPI Index is used to adjust your purchase cost.
This becomes your effective cost of the purchase to calculate the net return percentage after tax on gold. At the time of your purchase of physical gold, GST is added to the purchase price.
2. Digital Gold
In the case of your investment in digital gold, the gold tax rate applied to your return depends on your holding period. Suppose you held the investment for less than 36 months. In this case, your returns will be taxed at your applicable slab rate.
If you held the investment for longer than 36 months, your tax on the gold rate is 20.8% (tax rate of 20% + cess at 4%). Indexation will be applied to your cost of investment. Your return will be calculated after adjusting the effect of any changes in the CPI Index. The tax on gold investments rate is 20.8%.
3. Tax on gold held in mutual funds and Gold ETFs
The taxation policy on both these investments is similar to the taxes you pay on your physical gold holdings. When you hold for less than 3 years, you will be taxed at your applicable slab rate.
When you hold for a longer period beyond 36 months, you pay taxes on your gold investments at 20% + surcharge + 4% cess on your returns. You pay fund management charges which vary between 0.5% to 1% p.a. of your gold investments at 20%
4. Tax on Gold held in the form of SGBs
If you redeem your investment in SGBs before 8 years but after 5 years of holding them, you pay long-term capital gains tax according to the following formula: 20% +4 % Cess. You also get an indexation benefit.
There is no tax on gold investments in SGBs after 8 years. The interest you earn on SGBs is taxable under the head ‘income from other sources’. You are taxed on the interest income at your applicable income-tax slab rate.
Return Calculation With Indexation Example
Let us say that you purchased gold in 2013. The CPI Index level was 104.6. You sold your gold investment in 2019. The CPI Index in 2019 was 141.1. The purchase value of your gold investment in 2013 was Rs 50,000. The growth in the CPI Index is 34.89% during this period. Your adjusted cost after indexation is calculated a: 50000X (1.3498) = Rs 67447.42. You sold your gold investment in 2019 at Rs 75,000. The tax calculation will be as follows:-
|Cost of gold purchase in 2013 (1)
|Sale value of the gold investment in 2019 (2)
|The effective cost of gold after indexation (3)
|Net return applicable to tax after indexation 4 (2-3)
|Long-term capital gains tax payable (4)X 20.8%
Gold is a precious metal and highly valuable. Gold prices appreciate over time. You gain considerable benefits by investing in gold. You should understand all the tax implications on different forms of gold investment. If you liked this blog, visit Piramal Finance to learn more about different forms of investment.