Be it jewellery, gold ETF or gold bonds, you should know the tax treatment before investing in gold.
After my article on how much gold you can keep readers have requested me to write on taxation aspects of profits on sale of gold and its variants. Let us discuss.
Basic aspects of taxation of gold
The profit on sale of your gold is taxable under the head “Capital Gains” unless you are a dealer in gold and jewellery in which case it becomes taxable under the head ”Profits and gains of business or profession”. The tax liability and exemptions from payment of tax available will depend on your holding period. The gold sold can either be purchased by you or received by way of a gift or inheritance. The computation process will depend on the mode of such acquisition.
Taxation of gold purchased
The profits on sale of gold can be either short term or long term depending on the period for which gold was held. In case, the gold is held for more than 36 months, profit on sale of it is treated as long term else it is considered short term. The short term capital gains is treated like any other income and is added to your regular income which is taxed at the slab rate applicable to you. The long term capital gains are taxed at 20% and applicable surcharge and education cess, after taking the benefit of enhancing your purchase price by using the cost inflation index for the year of purchase and for year of sale. The long term capital gain is computed by reducing such indexed cost from the net selling price realised. In case your profits are of long term in nature you can claim exemption on such indexed long term gains by investing the amount of such capital gains in a residential house under section 54. Alternatively you can claim the exemption by investing such gains in capital gains in bonds of Rural Electrification Corporation (REC) or National Highway Authority of India under section 54EC.
Taxation on sale of gold received by inheritance or gift
In respect of gold received as gift the same would become taxable at the time or receipt in case value of all the gifts received by you during the year exceeds Rs. 50,000 in a year. Gifts up to Rs. 50,000 in aggregate in a year are fully exempt. While arriving at whether a particular gift shall be included, gifts received from close relatives and those received at the time of marriage are excluded without any monetary limit. Please note any asset received as inheritance either under a will or under the law of succession applicable to you is fully exempt.
Capital gain tax liability is triggered at the time of sale of gold which is received as inheritance or gift. While computing the holding period of such gold the period from the date when it was held by the previous owner who had actually paid for it is considered and same is treated as long term if the combined holding period is more than 36 months. For cost of acquisition, amount paid by the previous owner who had paid for it is taken. For example, in case you inherited gold jewellery from your mother which in turn was inherited by your mother from her mother. If your grandmother had purchased it for Rs 50,000, then the amount paid by your grandmother shall be considered as the cost of acquisition for calculation of taxable capital gains. However, in case the jewellery was inherited by you or purchased by your grandmother before April 1, 1981, you have the option to consider the fair market value of such jewellery on April 1, 1981 instead of the cost of acquisition, which will be eligible for indexation as well. In case the jewellery is inherited by you after April 1, 1981, you will have to take Rs. 50,000 as the cost of acquisition and the benefit of indexation will be available from the year in which you inherited it as per the strict legal reading of the provisions of law. However, there are various decisions of few high courts, including Mumbai, Delhi and Gujarat where the courts have held that in respect of inherited property or received as gift, taxpayer will not only be entitled to substitute the cost paid by any of the previous owners in case the asset is acquired after April 1, 1981, but also the taxpayer shall be entitled to get the benefit of indexation from the year in which that previous owner had acquired the property.
Taxation of Gold Exchange Traded Fund (ETF)
Units of gold ETFs are treated as debt funds and taxed accordingly. The holding period, tax rate and exemption available are similar to that of gold discussed above. The holding period for ETF to qualify as long term is more than 36 months and the tax rate applicable would be 20%. The same tax saving avenues are available as those under section 54 and 54EC for long term capital gains on gold ETFs.
Taxation under gold monetisation scheme
The deposit certificate issued for gold deposited under the Gold Monetisation Scheme 2015 are not treated as capital asset for the purpose of capital gains taxation under the income tax law so any profits made on redemption/ maturity of such deposits are fully exempt from taxation. Further, interest earned on such deposit certificates is also fully exempt.
The interest on sovereign gold bonds shall be taxable in your hands but the capital gains on such bonds shall be fully exempt on maturity. However, the profits made on sale of such bonds before the redemption date shall be taxable depending on the holding period and the exemptions shall also be available if the capital gains are long term in nature and the indexed capital gains are invested either in a residential house or in specified bonds.
Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at firstname.lastname@example.org