Understanding Income Tax on Selling Physical & Digital Gold

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

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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.

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You can now take full advantage of gold investment without purchasing physical gold. Read our detailed guide on digital gold investment.

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If you profit from these investments, you must pay income tax on your gold investment gains under various categories.

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Do you know what the tax on gold profits is, and how are the capital gains from gold sales taxed?

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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.

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Since the Indian tax authorities view gold as an investment, net taxes include any capital gains from it.

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In this blog, we’ll discuss how income tax is levied on digital and physical gold.

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Taxation Basics for Gold Investments

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The most common way of buying gold is in the form of jewellery, gold bars, coins, and digital gold.

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The taxation of capital gains from the sale of physical gold depends on whether they are short-term or long-term capital gains.

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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).

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‍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.

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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.

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The tax rate on long-term capital gains from the sale of gold assets is 20%, plus an applicable surcharge and education cess.

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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.

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The higher the value, the lower the profit, and therefore the lower the total tax revenue.

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Physical Gold vs Digital Gold

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Physical Gold	Digital Gold
The purity of physical gold may vary and isn’t always 99.5%.	Digital gold is consistent, and its purity is guaranteed.
The price of physical gold varies from region to region.	Digital gold prices are uniform across the country.
Investing in physical gold requires purchasing gold bars or coins and requires a larger investment amount.	Investments in digital gold are flexible, with prices as low as Re. 1.
Physical gold incurs an additional manufacturing charge of 20-30%.	Digital gold incurs a GST charge of 3%.
Physical gold needs to be stored in a locker, which incurs storage charges if you choose a bank locker.	Digital lockers securely store digital gold, eliminating any risk of theft or scratches.
Physical gold is bought and sold through jewellers or dealers.	You can easily sell digital gold online or convert it into cash, coins, or bullion.
Physical gold held for less than 3 years is taxed according to the investor’s income tax slab rate. For gold holdings over 3 years, gains attract a 12.5% tax without indexation benefit.	Taxes on digital gold are the same as those on physical gold.

Holding Period of Gold

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Holding Period	Type of Capital Gain	Tax Rate
Less than 3 years (36 months)	Short term	As per the taxpayer’s income slab
More than 3 years (over 36 months)	Long term	12.5% without indexation benefit (as of 2024)

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Difference Between Capital Gains Tax and Regular Income Tax

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Capital Gains Tax	Income Tax
The profits from the sale of a capital asset are subject to capital gains tax.	Income tax is a direct tax applicable on the income earned and profits made during a financial year.
Capital gains tax is levied on the sale of assets such as real estate, stocks, mutual funds, gold, etc.	Income tax includes various earning sources like interest, rent, salaries, wages, etc.
Capital gains tax is applicable based on the asset’s holding period.	Income tax is applied according to an individual’s tax bracket.
There are two kinds of capital gains: short-term capital gains (STCG) and long-term capital gains (LTCG).	Income tax is categorised into five sections: Income from salaries Income from business/profession Income from rent Income from the sale of capital assets Income from other sources

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Income Tax on the Sale of Physical Gold vs Digital Gold

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Let us understand the tax applicability on the sale of physical gold and digital gold.

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Parameters	Income Tax on Sale of Physical Gold	Income Tax on Sale of Digital Gold
Short-Term Capital Gains	Selling physical gold before a period of 36 months is considered a short-term capital gain. It is taxed according to the individual’s tax bracket.	Selling digital gold before the 36-month mark also counts as a short-term capital gain and is subject to the same taxation as physical gold.
Long-Term Capital Gains	Selling any form of physical gold after a holding period of 36 months attracts a long-term capital gains tax of 20% with a 4% cess charge.	After a 36-month holding period, the sale of digital gold is subject to long-term capital gain taxes. The tax rate is 20% plus a 4% cess charge.

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What Is Digital Gold?

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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.

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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.

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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.

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GST and Digital Gold

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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.

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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.

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Additionally, a 3% GST is applicable on the sale and purchase of digital gold.

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Key Factors That Influence Tax Liability

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Several factors can influence the tax liability on gold investments.

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Cost of Acquisition and Selling Price

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The cost of the acquisition of gold includes various factors such as:

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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.

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The selling price of gold is also influenced by several factors, including the following:

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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.

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Indexation Benefits for LTCG

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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.

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This method is helpful for long-term investments by mitigating the impact of inflation on investment returns.

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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.

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Ways to Save Taxes on Gold Sales

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Paying capital gains on gold sales can be quite expensive; however, there are ethical ways to save taxes.

Investing in Capital Gains Bonds

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Section 54EC of the Income Tax Act of 1961 allows tax exemption on long-term capital gains through the sale of gold assets.

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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.

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Utilise Gold Sale Proceeds to Buy Residential Property

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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.

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Claiming Indexation Benefits

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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.

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Common Mistakes to Avoid While Calculating Income Tax

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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

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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

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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.

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The main difference is the duration of gold holdings, and if you misclassify your investment, you may incur additional tax.

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FAQs

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Is there any tax on digital gold?

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Indeed, both short-term and long-term capital gains tax digital gold similarly to physical gold.

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How are short-term capital gains calculated on gold?

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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.

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How are long-term capital gains calculated on gold?

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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.

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What is the GST amount applicable on digital gold transactions?

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Digital gold transactions attract an additional 3% GST on sale of digital gold.