Planning to book profits in gold or silver ETFs? Know why Rs 1.25 lakh LTCG tax exemption limit won’t apply

gold etf

• Gold ETFs returned 16.65% in 10 years, silver 59.24%
• Gold and silver ETFs do not get the Rs 1.25 lakh LTCG exemption
• Tax loss harvesting can offset gains from gold and silver ETFs

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The recent rally in precious metals has encouraged many investors to increase their exposure to gold and silver in different forms, especially through exchange-traded funds (ETFs).

Over the past decade, gold ETFs have delivered returns of around 16.65 percent, while their one-year gains have gone as high as 82.32 percent. In comparison, silver ETFs have offered stronger performance, with returns of about 59.24 percent over 10 years and as much as 171.30 percent in the past year.

However, investors who have moved into gold and silver exchange-traded funds over the past year should double-check the tax impact before selling.

Although these ETFs are bought and sold on stock exchanges just like shares, they do not qualify for the Rs 1.25 lakh annual exemption available on long-term capital gains from equities.

Why is the Rs 1.25 lakh exemption limit not available for gold and silver ETFs?

Gold and silver ETFs are funds that mirror the market prices of physical gold or silver, typically backed by actual metal in vaults. Traded on stock exchanges like NSE or BSE, they offer retail investors a simple, liquid alternative to buying bullion.

Section 112A's Rs 1.25 lakh LTCG exemption covers only listed equity shares and equity-oriented mutual funds (≥65% equity). Gold/silver ETFs qualify as non-equity assets under Section 112, so no exemption applies.

How are gold/silver ETFs taxed then?  Tax treatment depends on the holding period under the Income Tax Act. Short-term capital gains (held within 1 year) are taxed at the applicable slab rates, while long-term capital gains (held more than 1 year) attract 12.5 percent tax, without indexation.

"Although Gold and Silver ETFs are traded on the floor of stock exchanges, they are not classified as equity shares or equity-oriented mutual funds or units of business trust. Therefore, Rs 1.25 Lakh annual exemption available for long-term capital gains on equity shares or equity-oriented mutual funds or units of business trusts is not available to these ETFs,” said Gopal Bohra, Partner -Tax, NA Shah Associates.

Can you use tax harvesting for gold and silver ETFs?

Tax-loss harvesting involves selling shares or mutual fund units at a loss. The realised capital loss can be used to offset taxable capital gains, thereby lowering the overall tax outgo.

Let us understand with table the potential tax benefits that can arise from tax loss harvesting:

“Tax loss harvesting can be used for gold and silver ETFs; it lowers LTCG tax on these ETFs by offsetting losses from other long-term capital assets,” said Chandni Anandan, Tax Expert, ClearTax.

While planning tax harvesting, one must also consider losses carried forward from earlier years. These losses can be set off against current-year capital gains as per the prescribed rules.