Income Tax Implications On Sale OF Gold–Physical Gold, Digital Gold, ETFs, SGBs

The profit from the sale of gold attracts income tax. The income tax rules depend on the form of gold redeemed.

You can buy gold in several ways—physical gold through jewelry or coins, smart or digital gold, gold exchange-traded funds (ETFs)or gold mutual funds, and sovereign gold bonds (SGBs) issued by the Reserve Bank of India to buy physical gold.

As mentioned above are taxed, there is a slight difference in the way the capital gains on the sale of different types of gold.

Capital gain means the net profit that an investor earns after the sale of a capital asset over the purchase price.

The total value earned from the sale of the capital asset is treated as taxable income. In order to be eligible for taxation in one fiscal year, the transfer of capital assets must be made in the previous fiscal year.

Types of Capital Gains

According to the period of holding assets, investment income can be roughly divided into the following types:

• Short-Term Capital Gains: If the asset is sold within 36 months from the date of purchase, the profit from the asset is called short-term capital gains.
• Long-Term Capital Gains: The profit from the sale of assets held for more than 36 months is called long-term capital gains. 

Read on to understand the income tax implications on the sale of different types of gold

Income Tax Rules For Capital Gains On The Sale of Physical Gold

Capital gains on the sale of physical gold jewelry and coins have the same taxation rules as the capital gains in debt funds.

Short-term capital gains will be added to your income and taxed in accordance with your applicable income tax standards. 

If the holding period of the physical asset (gold) is less than 3 years from the date of purchase, the proceeds are considered as short-term capital gains.

After indexing, long-term capital gains will be taxed at a rate of 20%. If the holding period of the asset (gold) exceeds three years, the proceeds from the sale of gold will be long-term capital gains.

Indexation is a process that can enhance the purchase price of assets while taking into account the impact of inflation. Indexation considers the inflation from when you invest in assets to when you sell them.

Income Tax Rules For Capital Gains on Sale Of Smart Gold or Digital Gold

Smart gold or digital gold is a relatively new concept. Many banks, online investment portals have been bundled with MMTC-PAMP or SafeGold to sell gold through their platforms. 

The capital gains from the sale of digital gold are also taxable, just like physical gold, gold mutual funds, or gold ETFs. The same rules as mentioned earlier will apply.

Income Tax Rules For Capital Gains On Sale Of Gold ETFs, Gold Mutual Funds

Capital gains from the sale of gold mutual funds and gold exchange-traded funds (ETFs) also have the same taxation rules as capital gains in debt funds. The above-mentioned tax rules will apply.

Gold exchange-traded funds (ETF) is a passive form of investment, which invests in physical gold.

Income Tax Rules For Capital Gains On The Redemption Of SGBs (Sovereign Gold Bonds)

Capital gains generated at the time of maturity of SGBs will be completely tax-free. The maturity period of a sovereign gold bond is eight years and it can be withdrawn early from the fifth year.

If you exit through the secondary market early (before the maturity period), then the capital gains tax similar to physical gold or gold mutual funds or gold ETFs will be levied.

SGBs are government securities and the specific debt instruments issued by the government. They can be denominated in foreign currency and domestic currency. It is mainly denominated in grams of gold. They are an alternative to holding the physical asset(gold). 

Just like other bonds, these bonds also promise to pay a certain amount of interest to the buyer within a specified period of time and repay the face value when they are due. Moreover, they also have ratings associated with them, which is essential for their credibility.

Investors must pay the issue price in cash, and the bond will be redeemed in cash on maturity. The bond is issued by the Reserve Bank on behalf of the Indian government.

Gold bonds pay interest at an annual rate of 2.50%, and the interest is taxed exactly in accordance with your taxation method. No additional tax is deducted at the source.