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Planning to Invest in Gold? Understanding the taxation of both physical and digital gold upon sale is crucial. Know everything about the taxes on gold.
Introduction
We all know that Indians have traditionally been among the largest gold investors. With the emergence of other non-physical options such as digital gold, ETFs, gold funds, and sovereign gold bonds, India's gold investment has expanded.
You can now take full advantage of gold investment without purchasing physical gold. Read our detailed guide on digital gold investment.
If you profit from these investments, you must pay income tax on your gold investment gains under various categories.
Do you know what the tax on gold profits is, and how are the capital gains from gold sales taxed?
It is crucial for you to comprehend the taxation of both physical and digital gold upon sale, regardless of whether you are investing in it or already owning it.
Since the Indian tax authorities view gold as an investment, net taxes include any capital gains from it.
In this blog, we’ll discuss how income tax is levied on digital and physical gold.
Taxation Basics for Gold Investments
The most common way of buying gold is in the form of jewellery, gold bars, coins, and digital gold.
The taxation of capital gains from the sale of physical gold depends on whether they are short-term or long-term capital gains.
If you sell your gold assets (which may be gold jewellery, digital gold, or coins) within three years from the date of purchase, any proceeds from that sale will be considered short-term capital gains (STCG).
It will basically be added to your annual income, and as a result, you will have to pay tax effectively on the highest income tax slab under which your income falls.
However, the proceeds from the sale of your jewellery, gold coins, or digital gold will be considered long-term capital gains (LTCG) if you sell them three years or more after the date of purchase.
The tax rate on long-term capital gains from the sale of gold assets is 20%, plus an applicable surcharge and education cess.
In simple words, you have to calculate taxes with indexation. The process of indexation adjusts the acquisition cost to inflation by inflating it at the rate of inflation during the holding period.
The higher the value, the lower the profit, and therefore the lower the total tax revenue.
Physical Gold vs Digital Gold
Holding Period of Gold
Difference Between Capital Gains Tax and Regular Income Tax
Income Tax on the Sale of Physical Gold vs Digital Gold
Let us understand the tax applicability on the sale of physical gold and digital gold.
What Is Digital Gold?
Digital gold is a new way of investing in gold without owning it physically. Investors can purchase digital gold online through online platforms like the Jar App.
An insured vault safely stores the physical gold equivalent of the purchased digital gold. The introduction of digital gold eliminates the risk of theft, impurities, and storage fees.
The price of digital gold is uniform across the country, and investors can buy or sell gold at any time from anywhere. It can be purchased for as low as ₹1.
GST and Digital Gold
Digital gold is subject to capital gains tax if and when sold. Holding digital gold for more than 36 months qualifies it as a long-term capital gain, subject to a 12.5% tax rate without indexation benefits.
However, if you sell a digital gold investment before a 36-month period, we treat it as a short-term capital gain. The investor's income slab determines the taxation of short-term capital gain.
Additionally, a 3% GST is applicable on the sale and purchase of digital gold.
Key Factors That Influence Tax Liability
Several factors can influence the tax liability on gold investments.
Cost of Acquisition and Selling Price
The cost of the acquisition of gold includes various factors such as:
- Price of gold at the time of purchase.
- Making charges of 20% to 30% in case of purchasing gold jewellery.
- The total cost of gold, including making charges, is subject to a 3% GST.
- Hallmarking charges are applied to certify the purity of gold.
The selling price of gold is also influenced by several factors, including the following:
- The prevailing market price of gold during the sale is a crucial factor that influences the price of gold.
- During the sale of gold, factors such as brokerage fees or commissions may be applicable.
- The long-term capital gains rate is applicable on selling gold after a holding period of over 3 years. The LTCG levies a 20% tax with indexation benefits.
Indexation Benefits for LTCG
Indexation benefits refer to a method that allows investors to reduce the capital gains tax rate on assets sold by adjusting the purchase price of the asset for inflation.
This method is helpful for long-term investments by mitigating the impact of inflation on investment returns.
After the 2024 budget revisions, the LTCG on the sale of gold held for over 3 years has been reduced from 20% to 12.5%. However, the indexation benefit has been removed.
Ways to Save Taxes on Gold Sales
Paying capital gains on gold sales can be quite expensive; however, there are ethical ways to save taxes.
Investing in Capital Gains Bonds
Section 54EC of the Income Tax Act of 1961 allows tax exemption on long-term capital gains through the sale of gold assets.
This exemption only applies to investors who invest their profits into capital gains bonds within 6 months from the date of the transfer of assets.
Utilise Gold Sale Proceeds to Buy Residential Property
Section 54F of the Income Tax Act of 1961 allows investors to claim capital gains tax exemption on the sale of gold if they invest the profits into purchasing a residential property.
Claiming Indexation Benefits
Indexation benefits allow investors to reduce their capital gains tax amount by adjusting their gains for inflation. Investors can claim indexation benefits while paying capital gains on their gold holdings.
Common Mistakes to Avoid While Calculating Income Tax
It is essential to be aware of common mistakes that you must avoid while calculating your income tax on gold.
Not Keeping Purchase Proofs or Receipts
Always save your purchase proofs and receipts to correctly calculate your taxable income. These receipts will also act as your income tax receipts while filing your tax form.
Misclassifying Digital Gold Investments
It is important to understand the classification of short-term capital gains and long-term capital gains to calculate the taxability of your digital gold investments.
The main difference is the duration of gold holdings, and if you misclassify your investment, you may incur additional tax.
FAQs
Is there any tax on digital gold?
Indeed, both short-term and long-term capital gains tax digital gold similarly to physical gold.
How are short-term capital gains calculated on gold?
If you sell your gold in less than 3 years, you will incur short-term capital gains tax. The investor's income tax slab determines how to tax short-term capital gains.
How are long-term capital gains calculated on gold?
Long-term capital gains on gold sales are taxed for gold held for more than 3 years duration. In 2024, the Long-Term Capital Gains (LTCG) on gold underwent a reduction from 20% to 12.5%, without any indexation benefit.
What is the GST amount applicable on digital gold transactions?
Digital gold transactions attract an additional 3% GST on sale of digital gold.
