Gold continues it record-breaking spree but it has done little to dim its appeal, with Dhanteras and Diwali, when buying the precious metal is considered auspicious many, drawing near.
Physical gold investments, however, pose storage costs and purity concerns. Sovereign gold bonds (SGBs) and gold exchange-traded Funds (ETFs) offer a more secure and tax-efficient alternatives. These instruments offer portfolio diversification coupled with tax advantages under the income tax act.
Tax benefits of gold ETFs
Gold ETFs are mutual fund units traded on stock exchanges that track the price of gold, allowing investment without physical ownership. Their tax treatment depends on the acquisition date and holding period.
For units purchased before April 1, 2023, short-term capital gains (STCG) on holdings of up to 36 months are taxed at investor’s income-tax slab rate. Long-term capital gains (LTCG) from holdings over 36 months are taxed at 20 percent with indexation, which accounts for inflation and reduces the overall taxable gain.
For units bought between April 1, 2023, and March 31, 2025, all gains are treated as short-term and taxed at slab rates following the withdrawal of indexation benefits under the Finance Act, 2023. For units acquired on or after April 1, 2025, a holding period of 12 months or less results in STCG, while LTCG (over 12 months) is taxed at a flat 12.5 percent without indexation, according to the finance (No. 2) act, 2024.
A key advantage of Gold ETFs is their ability to offset capital losses. “In the event of a capital loss on sale of Gold ETFs, such loss is eligible for set-off under the provisions of the IT Act,” said Suresh Surana, a Mumbai-based chartered accountant. Short-term capital losses can be offset against both STCG and LTCG, while long-term capital losses can only be offset against LTCG. Unabsorbed losses can be carried forward for eight assessment years, offering flexibility for tax planning.
Also read | Gold to glitter this Dhanteras: Prices may rise up to Rs 1.3 lakh, Rs 1.5 lakh likely by 2026, say experts
Tax advantages of SGBs
Sovereign gold bonds, issued by the Reserve Bank of India, combine the benefits of gold price appreciation with a fixed 2.5 percent annual interest. Their tax treatment is attractive.
Interest income is taxable under “Income from other sources” at the investor’s slab rate. “SGBs go a step further — the capital gains on redemption at maturity (after eight years) are fully tax-exempt, making them one of the most tax-efficient gold investments available,” said Ruchika Bhagat, MD of Neeraj Bhagat & Co.
If SGBs are sold before maturity in the secondary market, capital gains tax applies. For sales on or after July 23, 2024, the Finance Act, 2024, reduced the LTCG holding period from 36 months to 12 months, with gains taxed at 12.5 percent without indexation. Short-term gains (holding period of 12 months or less) are taxed at slab rates. This tax exemption on maturity makes SGBs a compelling choice for long-term investors.
Comparing tax implications with physical gold
Physical gold such as ornaments or bars is taxed differently.
For sales before July 23, 2024, a holding period of 36 months qualifies gains as LTCG, taxed at 20 percent with indexation. Post-July 23, 2024, the LTCG holding period is reduced to 24 months, with gains taxed at 12.5 percent without indexation.
Short-term gains are taxed at slab rates. Unlike SGBs, physical gold offers no tax exemption on maturity, and additional costs like making charges and storage reduce its overall efficiency.
Gold ETFs provide liquidity and no lock-in period, making them suitable for investors seeking flexibility. SGBs, with an eight-year tenure and an exit option after five years, cater to those with a longer investment horizon.
“The choice between gold ETFs and SGBs should depend on an investor’s financial goals, holding period, and liquidity needs,” Surana said. While gold ETFs offer market-linked returns and loss set-off benefits, SGBs provide fixed interest and tax-free redemption.
Also read | Gold surge: ETFs rise, SGBs trade at premium, jewellery turns lighter
Tax efficiency
Both gold ETFs and SGBs eliminate the challenges of physical gold. Gold ETFs suit investors prioritising liquidity, as they can be sold anytime on the exchange. SGBs, with their interest income and tax-exempt redemption, appeal to those willing to commit for the long term.
Investors must maintain accurate records of transactions to ensure compliance with tax regulations. A balanced portfolio combining both instruments can optimise diversification and tax efficiency, aligning with varied financial objectives.
Gold ETFs and SGBs offer distinct tax-saving opportunities compared to physical gold. By leveraging their unique tax treatments — loss set-offs for ETFs and tax-free redemption for SGBs —investors can enhance returns while minimising tax liabilities. As Bhagat aptly puts it, “Let your gold investment not just shine but also save you tax.”
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