Income Tax on Gold: How Are Different Forms of Gold Are Taxed

It's no surprise that gold is considered the best investment option. As a result of market economic shifts over the previous year, gold prices have surged at an unprecedented rate.

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With the world becoming more uncertain, gold investments have grown important as a safe refuge for guaranteed and considerable returns. Although gold is no longer linked to currencies, it remains one of the most popular investments.

Investors purchase gold to diversify their risk. The gold market, like all markets, is subject to volatility and uncertainty. Gold is an essential haven in several countries compared to other precious metals used for investment.

Depending on their financial goals, individuals and investors invest in various types of gold. It is, therefore, critical to understanding the tax implications of gold investments. Unlike in the past, when buying real gold was the only way to invest in gold, now one can choose the form of investment that best meets his needs.

Many gold investments include digital gold, real gold, derivative contracts, and paper gold.

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Tax on Physical Gold Sales

Physical gold assets include gold ornaments, jewellery, coins, gold savings plans, and gold biscuits. Individuals selling actual gold would face a 20% tax rate plus a 4% cess on long-term capital gains. Short-term gold is defined as gold sold within three years of purchase, whereas long-term gold is defined as gold sold after three years.

According to your income bracket, short-term capital gains on gold transactions are added to your total gross income and taxed. On the other hand, long-term profits are subject to a 20.8 per cent tax rate and are subject to indexation. LTCG investors who own physical gold would be required to pay 20% of their gains in taxes, plus any applicable surcharge. Furthermore, there is a 4% cess on specific transactions, with indexation benefits.

The TDS rate does not apply when selling gold. However, if you pay cash for jewellery worth more than Rs 2 lakh, you will be charged a 1% TDS fee. When you buy gold jewellery, you'll have to pay a 3% Goods and Service Tax (GST) on the value of the gold plus any manufacturing costs, if any.

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Tax on Digital Gold

Digital gold is treated the same as actual gold regarding capital gains taxes. Digital gold is a relatively new investment strategy that has recently gained traction.

Returns on digital gold assets held for less than 36 months are not taxed heavily. Long-term capital gains would be subject to a 20% tax rate on the entire amount, plus a surcharge and a 4% cess with indexation benefits. Paytm, Google Pay, and PhonePe are among the mobile wallets that have partnered with MMTC-PAMP or SafeGold to sell gold for as cheap as Re 1.

The amount of taxes paid by an investor, on the other hand, is determined by how long the digital gold is retained.

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Tax on Paper Gold

Gold exchange-traded funds (ETFs) allow you to invest in gold without actually owning any. It's comparable to having stock in a corporation. This is the case because ETFs are dematerialized. Because the current gold price determines a gold ETF's value, any gold ETFs are treated the same as gains from selling actual gold.

Profits from gold ETFs and mutual funds are taxed the same way as profits from actual gold. SGB return, on the other hand, is subject to a distinct taxation regime. Short-term gold units are those sold within three years after purchase, and long-term gold units are sold after three years.

Short-term investors (with a holding duration of up to 36 months) would be exempt from paying direct taxes on their earnings. Instead, those profits are applied to other incomes, and the applicable slabs levy taxes.

Also read: What is Digital Gold? Why Should You Invest in it?

Gold Bonds Are Subject to a Tax When They Are Sold

However, you will earn 2.5 per cent per year if you invest in national gold bonds. Interest income is classified as a different source of income and is charged as such.

Profits earned after eight years of investing in SGB are tax-free. It's also worth noting that different tax rates apply to SGB returns in the case of a premature withdrawal.

Gold Bonds must be held for at least three years to be classified as a 'Long Term Capital Asset.' Short-term gold bonds are sold within three years of when they were purchased.

At the moment of redemption, gold bonds would be exempt from capital gains tax. If you keep until they mature (8 years) and generate some long-term capital gains when redeeming the gold bonds, you will not have to pay capital gains taxes on the benefit you receive. The bond would be exempt from TDS.

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Gold Derivatives are Subject to a Tax

A company's profits are taxed at 6% if its gross yearly income is less than Rs 2 crore. Gold derivatives gains can be claimed as business profits, which reduces the tax burden connected with such transactions. If the company's gross sales are less than Rs 2 crores in a particular year, 6% of the returns would be claimed as taxes.

Gold derivatives gains can be claimed as business profits, lowering the tax burden connected with such transactions. To benefit from Section 44AD of the Income Tax Act, you do not need to keep a complete record of your business's books and accounts.

(Check out 'Learn & Grow with Wizely' to read and learn more all about investment instruments.)

Samiksha Jaiswal

Samiksha Jaiswal