How are Different Types of Gold Investments Taxed

Gold investment can be a good idea aimed toward asset building in 2024. It might not sound prudent, especially with gold prices reaching well above Rs. 76,000 per 10 grams. Since crossing the Rs. 50,000 mark in 2020, gold is all set to reach new heights. So, why should you consider investing in gold (or gold-related instruments) in 2024?

By gold investment, traditional wisdom still thinks of hoarding gold so that it can be sold at a higher price later on. However, it must be kept in mind that gold attracts heavy taxation. Therefore, investors are keen on investing in gold stocks and exchange-traded funds (ETFs) instead of buying actual gold. These instruments help you hedge against market volatility. Let us now take a look at the type of investments you can make and the taxation in place for different gold investments.

• The government imposes a 12.5% capital gains tax on long-term holdings of physical gold (as her Union Budget 2024), plus a 4% cess on the tax, effectively bringing the overall taxable rate to 13%.
• Long-term investments in Sovereign Gold Bonds (SGBs) offer tax-free capital gains at maturity and provide 2.5% annual interest.
• You can invest in digital, physical, or paper gold, depending on your preference.

The following are the types of gold investments that you can consider before investing.

• Digital gold: You can buy digital gold without spending money on actual gold. The investments can be made through relevant apps that allow investments in digital gold. On some of these apps, you can begin investing with a paltry sum of Rs. 100.
• Physical gold: Of course, you can buy gold in the form of bars, coins, and even jewellery. However, you need to take care of storing the gold by yourself.
• Paper gold: Invest in paper gold, in the form of Sovereign Gold Bonds (SGBs) and gold exchange-traded bonds (ETFs) that provide good cover when the market crashes.
• Derivative contracts: Derivative contracts allow investors to hedge against market risks, and in the case of gold derivatives, gold is the underlying asset. These contracts are agreements to buy or sell gold at a specific price at a future date, regardless of market fluctuations. This provides the benefit of locking in prices to protect against significant losses due to market volatility. However, investors must adhere to the agreed-upon price and expiration date of the contract.

Investments in digital gold are taxable based on the holding period. If you sell digital gold within 36 months, the gains are considered Short-Term Capital Gains (STCG) and taxed according to your applicable income tax slab rate. However, if you hold digital gold for more than 36 months, the gains qualify as Long-Term Capital Gains (LTCG), and these are taxed at 12.5% without indexation, plus a 4% cess, making the effective tax rate 13%.

The tax levied on physical gold is similar to the tax levied on digital gold. If you sell your gold within 36 months, the gains you make are considered short-term capital gains and are taxed as per your income tax slab rate. If you sell the asset after 36 months, the LTCG gains will be taxed at 12.5% without indexation benefit.

ETFs and SGBs are types of paper gold investments. For the former, the taxation rates are similar to those of physical and digital gold. However, SGBs follow a different taxation method. Your investment in SGBs will earn a 2.5% interest per year, which will be taxed under the head ‘Income from other sources’. Moreover, SGBs come with a lock-in period of 5 years.

It is interesting to note that if you do not redeem your SGB before 8 years from the date of investment, any interest gained thereafter will not come under the purview of taxation. If you redeem your investment before that (but after 36 months), the profits will be deemed as long-term capital gains (LTCG) and taxed at 12.5% without indexation.

Income from gold derivatives is considered business income. Gold derivatives, like other financial derivatives, are taxed based on the actual profits and losses realised from trading activities. This income is treated as non-speculative business income, meaning you are required to maintain detailed records of your transactions, including mark-to-market gains and losses.

If you have followed the tax norms carefully, you will have noticed that about 13% tax is imposed on your gold investment sooner or later. However, taking recourse to the provisions under sections 54F and 54EE of the Income Tax Act can help reduce tax liabilities. Reinvesting the proceeds (LTCG) realised by selling gold into residential property or other eligible funds is the key strategy under these sections.

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