Union Budget 2023: Conversion of physical gold to electronic gold receipt not to attract capital gains tax

Nirmala Sitharaman also proposed to increase the import duty on silver dore, bars and articles to align them with that on gold and platinum.

The government in the Union Budget 2023-24 on February 1, 2023, excluded the conversion of gold to electronic gold receipts (EGRs) and vice versa from the purview of capital gains tax with an aim to promote the concept of electronic gold.

Finance Minister Nirmala Sitharaman also proposed that the cost of acquisition of the EGR for the purpose of computing tax should be the cost of gold. Further, the holding period for the purpose of capital gains tax would include the period for which gold was held by the assessee prior to its conversion into EGR.

Similarly, a provision for conversion from gold to EGR is also proposed.

EGRs cater to all market participants, which means that buyers and sellers on the exchange shall include individual investors, as well as commercial participants along the value chain like importers, banks, refiners, bullion traders, jewellery manufacturers, and retailers.

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Karan Batra, the founder of Chartered Financial Club, said, "The move will defer the taxation during the conversion stage from physical gold to electronic gold."

"It would also encourage people to convert their gold to electronic gold. But if you are offering your physical gold for conversion, make sure that the vault manager is a SEBI-registered entity."

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World Gold Council, a market development organisation for the gold industry, welcomed the move by the government to exempt the conversion of physical gold to electronic gold receipts from any capital gains.

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“It provides an overall digital boost to the industry and promotes investments in the electronic equivalent of gold. Directionally, this year’s budget can be considered positive for the industry,” Somasundaram PR, Regional CEO, India at World Gold Council.

Further, the government in the budget also proposed to increase the import duty on silver dore, bars and articles to align them with that on gold and platinum.

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“While the reduction in custom duty on gold from 12.5 percent to 10 percent is a step in the right direction, the hike in the Agriculture Infrastructure & Development Cess has brought the overall duty to 15 percent, same as before. High taxes will impede efforts to make gold an asset class, particularly at a time when gold prices have risen globally. Moreover, the thriving grey market has diluted efforts to reduce cash transactions and penalises organised and compliant players,” Somasundaram said.

According to Sandeep Shah, Managing Partner at NA Shah Associates, the thrust by the government is to bringing idle gold into the mainstream.

“It is estimated that India has an annual demand of over 800 to 900 tonnes. Also with risk management practices put in place by SEBI, EGR is on its way to becoming a preferred instrument by investors. EGR not only infuses transparency in gold spot transactions but also eliminates market inefficiencies and to top it up, give India a position to command the price setting in international markets,” said Shah.

"Right now there was ambiguity on whether capital gains tax will apply to creating an EGR, but that has been cleared up. EGRs are not really used at the moment as the GST framework makes them unviable as security. As and when GST rules are amended, EGRs will become a viable security".

Gaurav Mathur, Founder and MD, SafeGold, said, “In our opinion, this is a great step. We are hoping that it would create a positive environment for all non-physical forms of gold. Right now there was ambiguity on whether capital gains tax will apply to creating an EGR, but that has been cleared up. EGRs are not really used at the moment as the GST framework makes them unviable as security. As and when GST rules are amended, EGRs will become a viable security".