Income Tax On Digital, Physical and Paper Gold in India

Gold is now available for investors in different forms and options, namely Gold Exchange Traded Funds, Gold Mutual Funds, physical jewellery and bullion, digital gold, etc. While long-term capital gains on gold are taxed at 12.5% without indexation benefit and short-term capital gains are taxed at the applicable slab rates.

Taxation of Different Forms of Gold - An Overview

The following table shows tax rates and holding period differences for different forms of gold:

Form of Gold	Holding Period for STCG	STCG Tax Rate	Holding Period for LTCG	LTCG Tax Rate
Physical Gold (bars, coins, jewellery, digital gold)	≤ 24 months	Normal slab rates	> 24 months	12.5%
Gold ETF	≤ 12 months	Normal slab rates	> 12 months	12.5%
Gold Mutual Funds	≤ 24 months	Normal slab rates	> 24 months	12.5%
Sovereign Gold Bonds (SGB) -originally subscribed and held till maturity (8 years)	-	Exempt	Exempt	Exempt
SGB sold (other than above)	≤ 12 months	Normal slab rates	> 12 months	12.5%

What is Digital Gold?

• 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.

Income Tax on Digital Gold in India

• Sale of digital gold attracts taxes 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 short term capital gains on sale of gold, 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. 
• When you sell gold and purchase a residential house property with the sales proceeds, the capital gains on such sale of gold is proportionately exempted.

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. Analysing the tax implications on different forms of gold helps in streamlining investments and optimizing taxes.