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Buying gold? Know various options and tax implications of investing in gold

Amitava Chakrabarty
gold, investing in gold, options to invest in gold, physical gold, digital gold, gold exchange traded funds, ETF, gold mutual funds, MF, Sovereign Gold Bond, SGB, tax on gold, capital gain tax

Gold is glittering currently with the prices of the yellow metal hovering around the all-time high level, which has given over 21 per cent return to investors who invested in gold a year ago. As a result, the investor interest in gold is showing no signs of decline.

Of the many options available to investors to buy gold, holding it in physical form remains to be the popular. Before investing, however, you should know the ways through which you may invest in gold as well as the cost of holding and the tax implication under each options to make a wise decision to maximise your gains.

Gold is a capital asset. So, it attracts capital gains tax when it is sold. In case it is sold before expiry of three years from the date of purchase, any gain or loss on such sale is treated as short-term capital gain (STCG) or loss. On the other hand, if the date of sale is after three years from the date of purchase, any gain or loss on such sale is treated as long-term capital gain (LTCG) or loss. While you need to pay capital gain tax on gains, losses may be offset again similar gains.

The income may be of two types, recurring income during the period of holding through interest or dividend and capital gain or loss at the time of selling the gold.

Apart from gains, you may have to spend money during the period of holding to ensure safety of the precious metal, quantum of which may vary on the basis of investment option that you choose.

The investment options include, physical gold, digital gold, gold exchange traded funds (ETF), gold mutual funds (MF) and Sovereign Gold Bond (SGB) as discussed below:

Physical Gold: You may invest in physical gold by purchasing gold bars, gold coins and/or gold jewellery etc. Although you may touch and feel physical gold, enjoy wearing gold ornaments and even carry them from one place to other, but holding gold in these modes face risks of theft, burglary etc and attracts additional costs to ensure safety. Buying gold jewellery involves making costs also, which can’t be recovered at the time of selling the items.

Digital Gold: To eliminate the safety issues, you may buy gold in dematerialised form banks, fintech and brokerage companies that sale digital gold in partnership with MMTC.

Gold ETF/Gold MF: While gold ETFs passively invest in physical gold through stocks of organisations dealing in gold, gold MF invest in gold ETFs to take advantage of movement in gold prices. Apart from eliminating the safety issue associated with holding, investors also get opportunity to get dividends during the holding period.

Sovereign Gold Bond (SGB): Issued by the Government of India through Reserve Bank of India (RBI), such bonds carry sovereign guarantee as well as gives 2.5 per cent interest during the 8-year holding period. The bonds may be redeemed after 5 years as well as may be traded through stock exchanges.

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"Instead of holding physical gold, people can choose to invest in Sovereign Gold Bonds (SGBs) or Gold ETFs. There is no difference on tax treatment of capital gains arising on transfer of physical gold, gold ETFs and SGBs. However, if SGBs are held until maturity and redeemed on maturity date then no capital gain tax is payable on such redemption value. If the gold, ETFs or SGBs are held for more than 36 months before transfer, gains arising on such transfer is regarded as long term capital gain and chargeable to tax @ 20 per cent with indexation. Short term capital gain in all three modes of investment is taxable as per applicable tax rates to the tax payer," said Ashok Shah, Partner, NA Shah Associates.

"Apart from the usual price appreciation in gold, SGB also offers annual interest at 2.50 per cent on the value of investment and interest so earned is taxable as per applicable tax rates to the taxpayer," he added.

"Usually, SGB and ETF are preferred over physical gold considering handling and safety factor because both SGB and ETF can be held in dematerialised form. If someone is considering very long period of investments, SGB would be better amongst all on account of assured return of 2.50 per cent per annum and no tax on capital gains arising at the time of redemption of bond," Shah further said.

The following table shows comparative taxation on income as well as cost of holding of gold under various investment options: