Capital gains on gold schemes tax exempt (2024)

The two gold schemes launched by the government last year got a push in the form of tax exemption in Budget 2016. It was announced that any capital gains arising on redemption of the sovereign gold bond scheme would be exempt from tax. This change is applicable from 1 April 2017.

The finance minister had introduced the sovereign gold bond scheme in last year’s Budget, allowing retail investors to buy bonds with a face value equivalent to the gold price and earn an interest on them. The objective of this scheme was to reduce the demand for physical gold bought as a pure investment and, in turn, reduce the foreign exchange impact of importing gold.

The first tranche of gold bonds came to the market in November 2015 but received a tepid response, collecting only around 246 crore. The second tranche in January 2016 collected around 726 crore.

Apart from this, to incentivise the gold monetisation scheme, it has been proposed in this year’s Budget that the deposit certificates issued under the scheme be excluded from the definition of capital asset and, hence, be exempt from capital gains tax too. Interest received from this scheme is also proposed to be exempted from tax. The change is applicable from the next financial year, i.e., 1 April 2016.

On the gold monetisation scheme, some amendments were announced recently to make it more attractive for holders of physical gold.

“This is a pull strategy for gold bonds. If you sell physical gold, you are liable to pay capital gains tax. Whereas, on redemption of these bonds, now you won’t have to pay tax on gains," said Nilesh Shah, managing director, Kotak Asset Management Co. Ltd. “This can go a step further. A wealth tax can be levied on holding physical gold beyond a certain value. This would further dissuade people from holding physical gold and make them move towards gold bonds," he said.

Experts suggest that the popularity of both the schemes is likely to increase in time. The tax break will be a positive in developing this segment further.

Merged MF plans

Though there was little said on mutual funds (MFs) in the Budget, a clarification was made, which will make investors’ lives a little easier. It was announced that if an MF scheme’s ‘plan’ (let’s call this the consolidating plan) gets merged into another plan (consolidated plan), then the former’s investors don’t have to pay any capital gains tax. This is in continuation to a recommendation made in last year’s Budget that absolved investors in consolidating schemes from paying capital gains tax when their schemes were merged.

This year’s announcement merely irons out the wrinkles and is more of a clarification. According to the previous year’s Budget, if scheme A merges into scheme B, the former’s investors were exempted from paying capital gains tax when they booked profits. But what if scheme A’s dividend plan was merged into its growth plan?

“Last year, the Budget spoke about scheme mergers, however, it got technical. If fund houses have plans, say, a dividend plan with few investors, and it wants to merge that into an existing growth plan, the investors who were there in the dividend plan could be charged capital gains tax, if applicable," said the chief executive officer of a fund house who did not want to be named.

This year’s budget brings about much needed clarity on the matter.

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Published: 02 Mar 2016, 08:38 PM IST