Income tax on gold: SGB vs gold ETF vs physical gold. Know taxation rules here (2024)

There are various methods for investing in gold. Traditionally our forefathers used to invest in physical gold either in the form of jewellery or gold bars/coins. Our generation has more options including electronic modes like gold ETF, gold saving funds, and Sovereign Gold Funds to invest in gold.

How the profits on the sale of physical gold and Gold ETF and units of Gold Saving Funds are taxed?

For tax purposes, gold coins/bars and jewellery become a long-term capital asset if held for 36 months or more. Gold ETF and units of Gold Saving Funds bought till 31 st March 2023 are treated and taxed like physical gold and become long-term capital assets if held for 36 months or more.

The profits on sale after 36 months of holding are treated as long-term capital gains and taxed at a flat 20% after applying indexation. The profits made within 36 months are treated as short-term capital gains and are taxed as short-term capital gains at the slab rates applicable to you.

Profits on the sale/redemption of Gold ETFs or units of gold saving funds bought after 31 st March 2013 will be taxed as short capital gains irrespective of the holding period. So these will be taxed like your bank fixed deposits except that the profits will become taxable only when you sell or redeem your investments whereas, for interest on fixed deposits, you have two options to offer it for taxation. Either you can offer it for taxation on an accrual basis or on a receipt basis when you actually receive the interest on the maturity of the fixed deposits. The accrual or receipt basis of accounting in respect of interest has to be followed consistently year after year.

Taxation of Sovereign Gold Bonds

Interest on Sovereign Gold Bonds is paid @ 2.50% on the issue price and is credited to your bank account on a half-yearly basis. The interest received on Sovereign Gold Bonds is fully taxable even though no tax is deducted at the source at the time of payment of the interest.

The Sovereign gold bonds are redeemed after 8 years of its issue date. The subscriber has the option to opt for early redemption on the interest payment date after the completion of 5 years. As far as profits made at the time of redemption of Sovereign Gold Bonds are concerned, the same is fully tax-free in your hands. This rule for profits made on redemption applies, whether at the end of the original tenure of 8 years or on early redemption which is allowed after 5 years.

The exemption is applicable whether you acquired the SGB as an original subscriber or bought from a secondary market. This exemption on redemption is available only to an Individual and does not apply to other entities that are allowed to invest in SGB.

If the bonds are transferred or sold, the profits made on the sale of these bonds become fully taxable as long-term or short-term depending on the holding period. The holding period for

SGB is 12 months to make their long-term capital assets. If sold/transferred after 12 months, you are entitled to claim the benefit of indexation while computing the taxable long-term capital gains. You also have the option to pay a flat tax @ 10% of the profit if it is more beneficial than indexing the capital gains. You can also claim an exemption under Section 54F for such long-term capital gains by investing the proceeds in a residential house within the specified time period.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on Twitter.

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Published: 29 Jul 2023, 06:35 AM IST