Income Tax on Gold – Investment Types, Rates, Exemptions

Investing in gold is very popular amongst investors. Based on their financial goals, individuals invest money into different forms of gold. Physical gold is the oldest form of gold investment. However, in recent times there are multiple options available for gold investment. Investors can invest in jewellery, gold coins, gold ETFs, SGB, digital gold, gold derivatives, etc. Different forms of gold investment have different tax treatments. Let us understand the tax implications on types of Gold Investments in India.

Income Tax on Physical Gold

Investment in Physical Gold means gold in the form of jewellery, bars, coins, or biscuits. Below are the tax provisions on the sale of physical gold.

  • Income Head – Income on the sale of physical gold is income from Capital Gains. If the taxpayer sells physical gold after holding it for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells physical gold after holding it for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – Taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.
On purchase of physical gold, the buyer must pay a GST of 3%. Further, on purchase of physical gold of more than INR 2 lacs in cash, the buyer must deduct and deposit TDS at rate of 1%.
Tip
On purchase of physical gold, the buyer must pay a GST of 3%. Further, on purchase of physical gold of more than INR 2 lacs in cash, the buyer must deduct and deposit TDS at rate of 1%.

Income Tax on Paper Gold

Paper Gold comprises Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds (SGB). In the case of paper gold, the investor holds gold on paper but not physically. Below are the tax provisions for paper gold.

Income Tax on Gold Mutual Funds and Gold ETFs

  • Income Head – Income on the sale of gold mutual funds or gold ETFs is income from Capital Gains. If the taxpayer sells gold mutual funds or ETFs after holding them for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells gold mutual funds or ETFs after holding them for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – The taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.

Income Tax on Sovereign Gold Bonds (SGBs)

  • Interest on SGB i.e. Sovereign Gold Bond is an IFOS income and taxed at slab rates
  • Income on sale of SGB on expiry of 8 years is exempt from tax
  • Income on sale of SGB after 5 years but before the expiry of 8 years is a Long Term Capital Gain and the tax rate is 20% with the benefit of indexation
  • Further, Income on the sale of SGB after 12 months but before 5 years is a Long Term Capital Gain and the tax rate is 10% without the benefit of indexation
  • Income on the sale of SGB within 12 months is a Short Term Capital Gain and the tax is payable at slab rates

Income Tax on Digital Gold

Digital Gold means investing in gold through mobile wallets like google pay, Paytm, ET Money, etc. The investor does not hold physical gold and has the ability to invest in gold through online mobile wallet applications. Below are the tax provisions on the sale of digital gold.

  • Income Head – Income on the sale of digital gold is an income from Capital Gains. If the taxpayer sells digital gold after holding it for more than 3 years, it is a Long Term Capital Gain (LTCG). If the taxpayer sells digital gold after holding it for less than 3 years, it is a Short Term Capital Gain (STCG).
  • Tax Rate – The taxpayer should pay income tax on STCG at slab rates and on LTCG at 20% with the indexation benefit.

Income Tax on Gold Derivatives

Gold derivatives are derivative contracts where the underlying asset is gold. An investor can buy gold derivatives from the commodities market. The tax treatment on the trading of gold derivatives is the same as income tax on commodity F&O trading.

  • Income Head – Income on the sale of gold derivatives is a Non-Speculative Business Income. The taxpayer can claim expenses against such income and compute taxable profit/loss by preparing a P&L account.
  • Tax Rate – Non-Speculative Business Income is taxable at slab rates.

Income Tax on Gift or Inheritance of Gold

Gifting or inheriting gold is a common practice in India. Below are the provisions for income tax on gift of gold:

  • Tax treatment for Receiver – Gold received in form of a gift or inheritance from a relative (spouse, children, parents) is exempt from tax as per Section 56(2) of the Income Tax Act. However, gold received as a gift or inheritance from any other person in excess of INR 50,000 is taxable under IFOS at slab rates. A gift in form of gold received on the occasion of marriage is exempt from tax. Further, if the taxpayer sells the gold received as a gift or inheritance, it is an income from capital gains and taxed at applicable rates
  • Tax treatment for Sender – The sender is liable to report income on the transfer of gold and pay tax at applicable rates as per the provisions mentioned above.

Income Tax Rules on Gold for NRIs

Taxpayers holding the status of NRI i.e. Non-Resident Indian as per the Income Tax Act can invest in all forms of gold investments except SGB (Sovereign Gold Bonds). The rules for taxation on the sale of gold investments in the case of NRI are the same as in the case of a Resident.

However, NRIs must pay TDS on the redemption of Gold ETF or Gold Mutual Funds:

  • 20% TDS on redemption of Long Term Gold ETFs and Mutual Funds
  • 30% TDS on redemption of Short Term Gold ETFs and Mutual Funds

ITR Form & Treatment of Loss on Sale of Gold

The taxpayer must file the following ITR on the income tax website to report the income from the sale of gold:

  • File ITR-2 to report income from capital gains on the sale of physical gold, digital gold, and paper gold
  • File ITR-3 to report non-speculative business income on the sale of gold derivatives

Following are the rules for set off and carry forward of loss on the sale of gold investments:

  • Short Term Capital Loss – The taxpayer can set off STCL against STCG and LTCG. They can carry forward the remaining loss for 8 years and set off against STCG and LTCG in future years.
  • Long Term Capital Loss – The taxpayer can set off LTCL against LTCG only. They can carry forward the remaining loss for 8 years and set off against LTCG in future years.
  • Non-Speculative Business Loss – In the current year, the taxpayer can set off this loss against all incomes except Salary. They can carry forward the remaining loss for 8 years and set off against business incomes only.

How to Save Taxes on LTCG from Investment in Gold?

Taxpayers having income from capital gains can save taxes by investing in specified assets as per the exemptions under Capital Gains. If a taxpayer has LTCG income from the sale of gold, here are the available options to avail of exemption if he/she fulfills the specified conditions as per the relevant section:

  • Section 54EE – Exemption available on the sale of any long-term capital asset i.e. sale of gold and investing into units of a fund notified by the Central Government to fund startups.
  • Section 54F – Exemption available on the sale of a long-term capital asset i.e. sale of gold (other than residential house property) and investing into a residential house property

FAQs

Do I need to pay tax on the sale of gold?

Yes. Gold in form of physical, digital or paper gold is considered a Capital Asset. The holding period to determine the nature of gain is 3 years. You must compute capital gains and pay tax at 20% on LTCG with indexation benefit or slab rates on STCG.

What is the tax rate on the sale of gold ETF?

Gold ETF is treated as a Capital Asset just like other ETFs and Mutual Funds. The tax rate on Gold ETF held for more than 3 years is 20% with the benefit of indexation and on gold ETF held for up to 3 years is at slab rates.

Are gold derivatives taxed in the same manner as physical gold?

No. Gold derivatives are taxed as Commodity derivatives and thus the tax treatment is different than in the case of physical gold. Income on the sale of gold derivatives is treated as a non-speculative business income and taxed at slab rates. The taxpayer must prepare P&L and Balance Sheet and report them in ITR-3.

I inherited gold from my parents. Do I need to pay tax on it and report it in ITR?

Gold inherited from relatives is exempt from tax as per Section 56(2) of the Income Tax Act. The definition of relative includes spouse, parents, and children. You should report it as Exempt Income under Schedule EI of the ITR and need not pay tax on it.

I received gold as a gift at my wedding. Do I need to pay tax on it and report it in ITR?

Gift received from relatives is exempt from tax as per Section 56(2) of the Income Tax Act. Gift received from non-relatives is taxable if the amount is in excess of INR 50,000. However, any gift received on the occasion of wedding is exempt from income tax. Thus, you can report it as exempt income in the ITR and need not pay tax on it.

Income Tax on ETF (Exchange Traded Funds) in India

Exchange-Traded Funds were launched in India in the year 2002. There are advantages of investing in ETF over shares and mutual funds. An investor can spread the risk by investing in the equities of multiple companies instead of investing in equity shares of a single company having a higher risk. Investing in ETFs is beneficial over mutual funds due to reduced expenses and higher liquidity.

What is ETF?

ETF i.e. Exchange Traded Fund is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. Thus, it holds all the stocks in the same proportion as held by the underlying index. It is an Index Fund that is listed and traded on a stock exchange just like a stock. The trading value is based on the Net Asset Value (NAV) of the underlying asset. It is a mutual fund that the investor can buy and sell on the stock exchange, unlike the normal mutual funds that the investor can buy and sell from the AMC. Income Tax on ETFs (Exchange Traded Funds) in India is similar to the tax treatment of mutual funds.

Types of Exchange Traded Funds (ETF)

The different types of ETFs can be classified on the basis of the securities in which they invest. Following are types of ETF:

  • Equity ETF – ETFs that invest in equity shares are and other equity-related instruments.
  • Debt ETF – ETFs that invest in fixed return securities like bonds and debentures.
  • Gold ETF – ETFs that invest in physical gold assets.
  • Currency ETF – ETFs that invest in currency instruments.

Income Heads for Income from ETFs

Capital Gain on Sale of ETF (Exchange Traded Funds)

  1. Equity ETFs – Since these ETFs invest in equity-oriented instruments, the treatment is the same as equity shares.
    • Long Term Capital Gain (LTCG): Any gain arising on the sale of equity ETF held for more than 12 months is considered as Long Term Capital Gain.
    • Short Term Capital Gain (STCG): Any gain arising on the sale of equity ETF held for less than 12 months is considered as Short Term Capital Gain.
  2. Other ETFs – ETFs such as Gold ETF, International ETF, Debt ETF, etc has tax treatment similar to other capital assets.
    • Long Term Capital Gain (LTCG): Any gain arising on the sale of other ETF held for more than 36 months is considered as Long Term Capital Gain.
    • Short Term Capital Gain (STCG): Any gain arising on the sale of other ETF held for less than 36 months is considered as Short Term Capital Gain.
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Other Income from ETF (Exchange Traded Funds)

  • Interest Income
  • Dividend Income
    • In most cases, the dividend is reinvested in the scheme. However, the ETF Fund may decide to distribute dividends to the investors.
    • Up to FY 2019-20 – Exempt Income.
    • FY 2020-21 onwards – Taxable Income under the head Income From Other Sources (IFOS) at slab rates.

Income Tax on ETF (Exchange Traded Funds)

Income Tax on Trading in ETFs is similar to the tax treatment of mutual funds. Following are the income tax rates:

Type of ETF Period of Holding Long Term Capital Gain Short Term Capital Gain
Equity ETF 12 months 10% in excess of INR 1,00,000 under Section 112A 15% under Sec 111A
Other ETF 36 months 20% with Indexation Slab Rates

ITR Form, Due Date and Tax Audit Applicability for ETF Investors

  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable

Carry Forward Loss for sale of ETFs

Gain or Loss on the sale of ETFs is a Capital Gain or Capital Loss. Here are the rules for set-off and carry forward of losses on the sale of ETFs.

  • The investor can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). Also, they can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
  • The investor can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. Further, they can carry forward the remaining loss for 8 years and set off against LTCG only.
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FAQs

How do I report income from sale of ETFs in the Income Tax Return i.e. ITR?

Traders should file ITR-2 and report income from sale of ETFs as Capital Gains.
– Equity ETF – Tax on LTCG is 10% in excess of INR 1 lac and tax on STCG is 15%.
– Other ETF – Tax on LTCG is 20% with indexation and tax on STCG is as per slab rates.
The investor can set off LTCL with LTCG and STCL with both STCG and LTCG, remaining loss can be carried forward for 8 years

Is ETF a better investment option than Mutual Funds?

Yes. ETFs are better than Mutual Funds for the following reasons:
1. The investor can buy and sell an ETF directly on the stock exchange, unlike the normal mutual funds.
2. Fees and investments in ETFs are lower than Mutual Funds since there is no fund manager to make investment decisions on behalf of the investor.
3. ETFs do not have a lock-in period and investors can sell it anytime. Mutual Funds like ELSS of 3 years reduces the liquidity of investors.

In the case of Mutual Funds, it is managed by an experienced Fund Manager who makes investment decisions for the investors. No such decision-maker is available in the case of ETFs.

How are Gold ETFs different from Gold Mutual Funds?

Gold ETFs are funds that invest in physical gold assets. Thus, asset base of the ETF is 90 to 100% gold. They are traded on exchanges and offer better liquidity.
Gold funds are mutual funds that invest in gold ETFs and other related assets. They do not invest in physical gold but Gold ETFs.

What is ETF Fund?

ETF is a basket of stocks that reflects the composition of an index like BSE Sensex or CNX Nifty. It is an Index Fund that is listed and traded on a stock exchange just like a stock. Therefore, it is a mutual fund that the investor can buy and sell on the stock exchange. IT on ETFs in India is similar to the tax treatment of mutual funds.