Income Tax On Digital, Physical and Paper Gold in India

Gold has always been a safe investment option for investors. Investment in gold can be in the form of digital gold, physical gold, Gold Exchange Traded Funds, Gold Mutual Funds, and gold derivatives. The taxation on gold depends on the holding period of the assets. The tax rate on gold for LTCG is 12.5% without indexation benefit and STCG is taxed at the applicable slab rates.

In this article, we will discuss everything about the methods through which investments can be made in gold and the tax implications for the same.  

Income Tax on Digital Gold in India

• The concept of digital gold is not different from that of physical gold. 
• The only difference is that you can buy them online and the issuer will store them in vaults on your behalf. 
• Moreover, government bodies like RBI or SEBI have no authority to regulate this investment type. 
• If you are planning to buy digital gold, you should know that it attracts tax as per the income tax rules for gold purchases. 
• Returns from gold held for 24 months or more are termed long-term capital gains; returns from gold that are held for less than this period are termed short-term capital gains (STCG).
• The tax on the sale of digital gold will attract the same as physical gold and paper gold. 
• LTCG on gold attracts 12.5% of tax with applicable cess. In the case of STCG, the tax is charged as per your income slab.

Taxes on Physical Gold Purchase

• The physical form of gold includes jewellery, gold biscuits, gold ornaments, gold coins, etc. For ages, the physical form of gold has been a popular investment option in India. 
• However, according to the Income Tax Act of India, you need to pay a 12.5% tax on long-term capital gains (LTCG) while selling gold. 
• However, this rate is not applicable for short-term capital gains. In the case of STCG, the tax is charged as per your income slab.

Income Tax on Paper Gold in India

• You can hold gold on paper but cannot acquire them physically. Gold Mutual Funds, ETFs, Sovereign Bonds, etc., are included in this type. 
• The income you generate by selling units of ETFs or mutual funds is referred to as your capital gain. 
• According to the rules regarding the gold tax in India, you are liable to pay a 12.5% tax on long-term capital gain on gold sales.
• However, for gold held less than 2 years, the applied tax rate will be as per your income slab.

Income Tax on Gold Derivatives

• The underlying asset for gold derivatives is gold itself and you can invest in these derivative contracts. 
• You can buy derivatives from the commodities market. However, the tax applicability on these derivatives is similar to the commodity F&O trading tax rate. 
• The profits from such sale is treated as a business income (non-speculative) and taxable at slab rates. 
• You can also claim an expense against the income generated by selling gold derivatives and prepare a P&L account to calculate the taxable income. 
• Gold derivatives' returns are eligible to be claimed as business income, which can curb the tax burden on such transactions. 
• As per some commentators, if we want to have the advantage of Section 44AD of the Income Tax Act, we will have to keep the correct books of accounts.

Income Tax on Gift or Inheritance of Gold

• Indians inherit and gift gold to their loved ones on special occasions. 
• However, if you are receiving gold as a gift or inheritance from family members or relatives, you can get an income tax exemption on such gold. 
• As per Section 56(2) of the Income Tax Act, gold received as a gift from parents, spouses, or children is not liable for income tax. 
• Gold received as gifts on the occasion of weddings are also not taxable.
• On the other hand, if you receive it from any other person apart from relatives which exceeds Rs 50,000, you need to pay taxes.
• Such income is taxable under the head Other Sources.
• However, on the sale of such gold received, capital gains tax gets attracted.

Income Tax Rules on Gold for NRIs

• As per the Income Tax Act, non-resident Indians can invest in physical gold, digital gold, paper gold, etc. 
• However, NRIs are not allowed to invest in Sovereign Gold Bonds as per RBI and FEMA norms. 
• Though the applicable tax rate on gold sales for NRIs is the same as the Indian residents.

How Can You Save Taxes on Long-Term Capital Gains from Gold Investments?

• An exemption on Long-Term Capital Gains can be claimed under Sections 54F and 54EC of the Income Tax Act 1961.
• Section 54F exemption can be claimed by investing the long-term capital gains into a residential house. 
• Section 54EC exemption can be claimed by investing the long-term capital gains in specified bonds such as REC and NHAI bonds. The maximum limit to claim exemption under this section is Rs. 50 lakhs. 

Final Word

Gold investment has been popular among Indians for years, but it is not a risk-free investment. The price of gold is affected by several economic factors and keeps on fluctuating like bonds and stock investments. Like most investments, and as discussed in the article, gold also has its income tax implications. However, you can be exempt from income tax on gold by following Section 54EC and Section 54F of the Income Tax Act.