Income Tax On Digital, Physical and Paper Gold in India

Investment can be made in gold in the form of digital gold, physical gold, gold Exchange Traded Fund, and gold derivatives. More often than not, may taxpayers receive gold as gift, on various occasions. 

Gold is classified as a capital asset; therefore, its sale results in either Short-Term or Long-Term Capital Gains, based on the holding period. If the gold is held for more than 24 months, the gains are considered Long-Term Capital Gains and are taxed at 12.5% without indexation. 

If held for 24 months or less, the gains are treated as Short-Term Capital Gains and taxed according to the applicable income tax slab rates. This article explains in detail, the tax implications on sale of different kinds of gold in India.

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 on basis of 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 and a 4% cess on long-term capital gains (LTCG) while selling gold. Thus, the chargeable tax on gold is 13%. 
• However, this rate is not applicable for short-term capital gains. In the case of STCG, the tax is charged on basis of your income slab.

Income Tax on Paper Gold in India

• You can hold paper 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 13% tax on long-term capital gain 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 gold purchases. 
• As per Section 56(2) of the Income Tax Act, gold received as gift from parents, spouses, or children not liable for income tax. 
• Gold received as gift on 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 sale of such gold received, capital gains tax implications get 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?

• If you don't want to incur taxes on your long-term gains from gold investment, then refer to sec 54F of income tax act.
• Section 54F allows you to invest the gains from the gold LTCG into a residential house. This investment will qualify you for exemption from tax on the entire returns.

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 own income tax implications. However, you can be exempt from income tax on gold by following Section 54EE and Section 54F of the Income Tax Act.