Income Tax on Gold - Digital, Physical & Paper Gold in India

When it comes to gold, we already know how revered it is, thanks to its cultural and traditional significance for centuries. Investing in it has also remained a top choice due to its consistent price escalation in recent years. Moreover, gold investments offer a dependable return over time, making them attractive for investors seeking portfolio diversification. It's no wonder that the nation's substantial gold imports were valued at $46.14 billion in the fiscal year 2021-22, which surged by 33.34% from the previous year.

With such robust consumption, the question arises, 'What are the tax implications when buying or selling gold?' It's important to note that certain circumstances require you to pay income tax on gold purchases. Let's turn into 'gold diggers,' so to speak, and find out more!

Taxes on Physical Gold Purchase

Buying or selling physical gold entails all forms, including jewellery, gold biscuits, ornaments, coins, etc., and has historically remained a popular investment option. According to the Indian Income Tax Act, selling physical gold incurs a tax of 20%, along with a 4% cess on long-term capital gains (LTCG). Thus, the overall taxable rate on gold stands at 20.8%. However, this rate doesn't apply to short-term capital gains.

Gold held for 36 months or more qualifies as long-term capital gains, while gold held for a shorter duration falls under short-term capital gains, taxed based on the individual's income bracket.

There are many other considerations you need to keep in mind as far as physical gold goes:

1) Customs Duty

The government imposes customs duty, or import duty, on imported gold due to the substantial portion of the country's gold demand being met through imports due to insufficient domestic gold mines meeting the demand. The majority of imported gold incurs customs duty. Recently, the Government of India (GOI) reduced the customs duty on gold bars from 12.5% to 10%. When combined with GST, the final tax on physical gold is 10% plus a flat 3% GST.

2) Agriculture Infrastructure Development Cess (AIDC)

The GOI collects AIDC for the nation's development. A 5% AIDC is levied on gold imports, up from the recent 2.5%. When combined with import duty, GST, and AIDC, the overall tax on gold amounts to 18%.

3) Goods and Service Tax (GST)

GST applies to the sale of gold by jewellers or merchants, transferring this cost to the end consumer. A 3% GST is imposed on physical gold purchases. For instance, upon importing ₹1 lakh worth of gold, a 3% GST will be charged on the value of ₹1,15,000 (after adding import duty and cess), totalling an additional ₹3,450 and raising the cost to the customer to ₹1,18,450.

4) Making Charges and Associated GST

Making charges, although not classified as tax, apply to crafting gold into coins or jewellery, attracting additional GST. While this GST on gold expense might not be explicitly delineated, it's included in the making charges section of the final bill during a gold purchase.

The GST levied on making charges stands at 5%. Assuming a minimum making charge of 8% for the above 1 lakh gold import example, resulting in charges of ₹9,200 on ₹1,15,000, and a 5% GST on these charges amounting to ₹460, the total cost would be ₹1,28,110.

5) Tax Deducted at Source (TDS)

For purchases of physical gold exceeding ₹1 lakh, a TDS of 1% is imposed. This amount can be adjusted against the annual tax liability.

Taxation on Selling Physical Gold

1) Short-term Capital Gains Tax (STCG)

STCG applies when gold is sold within three years of purchase. This gain is added to the individual's income and taxed based on their income tax slab, such that, for instance, if one falls under the 30% slab, the gain amount (sale price minus purchase cost) will be taxed at 30%.

2) Long-term Capital Gains Tax (LTCG)

LTCG on gold gains sold after three years of purchase is 20%, with an indexation benefit used to adjust the purchase price reflecting inflation's impact. This tax can be waived by using all the net proceeds to buy government tax-benefit bonds or invest in property within specific time frames.

3) GST on Jewellery Exchange

Exchanging gold jewellery involves nuances regarding taxation, requiring caution to prevent deception during transactions. Exchanging the same quantity of gold doesn't attract GST. For instance, exchanging 100 grams of jewellery for another 100 grams incurs no GST on the gold, with charges applicable only for the difference in making charges and related taxes. Hence, vigilance is essential to ensure accurate taxation and prevent overcharges during exchanges.

Taxation on Digital Gold

Taxation on Digital Gold operates similarly to physical gold. The basic difference is in the mode of purchase – one can buy digital gold online and store it securely in vaults by the insurer. Regulatory bodies like RBI or SEBI lack jurisdiction over this investment avenue.

If you're considering digital gold investments, you must be mindful that these purchases incur taxation following the income tax regulations governing gold investments, which is 20.8%, like physical or paper gold.

The taxation structure for digital gold offerings includes the following:

Taxation on SGBs

SGBs offer a tax-efficient way to invest in gold, especially for those seeking to hold the investment for three to eight years. While interest income is taxable, the exemption from LTCG and the minimal GST liability make SGBs an attractive option compared to physical gold.

Short-Term Capital Gains (STCG)

• Applicable if SGBs are sold within three years of purchase.
• Added to an individual's income and taxed based on the relevant tax slab.

Long-Term Capital Gains (LTCG)

• Applicable if SGBs are sold at a profit after three years.
• Taxed at 20% with indexation benefits or 10% without indexation.
• Exempt if held till maturity (eight years).
• Applies to individuals, not HUFs or Trusts.

Tax Advantages of SGBs

• No GST or Charges: SGBs are considered securities and digital assets, exempt from GST.
• Minimal GST Liability: STT and brokerage attract a maximum 0.75% GST.
• No TDS: Tax Deducted at Source (TDS) is not applicable for SGBs.

Interest Income Taxation

• Interest Rate: SGBs offer a 2.5% per annum interest rate.

Tax Liability: Interest income is added to your income and taxed according to your applicable tax slab.

Taxation on other Paper Gold

Unlike SGBs, these may not offer maturity benefits or physical redemption options.

• Investment Types: Gold Mutual Funds and ETFs
• Tax on Capital Gains:
  - Long-Term Capital Gains (LTCG): 20.8% with indexation benefits.
  - Short-Term Capital Gains (STCG): Taxed according to your income slab.

Tax on Gold Derivatives

Similar to Commodity F&O Trading, the tax treatment may vary depending on the trading strategy and holding period.

• Investment Type: Contracts based on gold price (commodities markets)
• Tax Implications: Similar to commodity Futures and Options (F&O) trading.

Tax Advantages: Expenses can be offset against income if classified as

Tax on Gold Inheritance or Gift

This can be a little confusing, and it is to your advantage to consult a tax advisor for clarification on specific inheritance or gifting scenarios.

• Tax Exemption: Gold received as a gift or inheritance from:
  - Parents
  - Spouse
  - Children (Section 56(2) of Income Tax Act)
• Taxable Event: Gifts exceeding ₹50,000 from non-relatives (Income from Other Sources)
• Wedding Gift Exemption: Gold jewelry received at weddings is tax-exempt, but subsequent sale triggers capital gains tax.

Tax for NRIs buying or selling gold

Certain rules apply when you are an NRI, so consult a tax advisor for specific tax implications and potential tax minimization strategies for NRIs.

• Investment Restrictions: NRIs cannot invest in Sovereign Gold Bonds (SGBs).
• Tax Rates: Similar to Indian residents.
• Tax Deducted at Source (TDS): Applies to Gold ETF or mutual fund redemptions.
• Short-term returns: 30% TDS
• Long-term returns: 20% TDS

Conclusion

Investing in gold can be a smart move, but remember, taxes play a role. Whether you choose physical gold, digital options, or paper gold instruments, understanding the tax implications is crucial. Explore tax-efficient options like SGBs for specific investment horizons. Remember, tax rules differ for inherited gold or gifts. Consult a tax advisor for personalized guidance. 

FAQs

Q1. How much gold is exempt from income tax?

Ans. In India, tax exemption on the amount of gold depends on how you receive it:

• If you receive it as a gift or inheritance: Gold received as a gift or inheritance from close family members (parents, spouse, children) is exempt from income tax under Section 56(2) of the Income Tax Act, regardless of the quantity. However, gifts exceeding Rs. 50,000 from non-relatives are taxable as Income from Other Sources. Gold jewellery received at weddings enjoys tax exemption, but any subsequent sale is subject to capital gains tax.
• If you purchase: When you purchase gold, there's no direct exemption based on quantity. However, taxes are levied on capital gains when you sell the gold.

Q2. What is the income tax on sale of personal gold jewellery?

Ans. The tax you pay on selling gold depends on how long you've held it:

• Sold within 3 years (Short-term Capital Gains): This is taxed as per your income tax slab. For example, if you're in the 30% bracket, the profit from selling the gold will be taxed at 30%.
• Sold after 3 years (Long-term Capital Gains): You pay a flat 20.8% tax, with an adjustment for inflation (indexation). This tax can be avoided if you invest the entire sale proceeds in government bonds or specific real estate investments within a set timeframe.

Exchanging gold jewelry generally doesn't attract GST as long as you're exchanging the same quantity of gold. However, you might pay tax on any difference in making charges or other fees associated with the exchange. 

Q3. Is digital gold more costly than physical gold?

Ans. Not really. Each case, whether it is digital gold or physical has its own set of considerations. Physical gold might be slightly cheaper upfront, but you'll need to factor in making charges, potential customs duty and GST, and storage costs. Digital gold has management fees and a slightly wider spread, but eliminates storage worries and offers secure storage. So, the "cheaper" option depends on your priorities: convenience and security with digital gold, or potentially lower upfront cost with physical (considering long-term storage).

Q4.How much gold can you keep at home with proof?

Ans. According to the Central Board of Direct Taxes (CBDT), there are limits on how much gold individuals can hold without risk of confiscation. These limits vary depending on marital status and gender:

• Married women: Up to 500 grams
• Unmarried women: Up to 250 grams
• Married and unmarried men: Up to 100 grams

Q5. How much gold is allowed without tax?

Ans. There's no limit on the amount of gold you can hold, but tax applies when you can't explain the source of income used to buy it. The Central Board of Direct Taxes (CBDT) outlines limits for unaccounted gold jewellery: women can possess up to 500 grams (married) or 250 grams (unmarried), and men can hold 100 grams.

Q6. What do you mean by a tax on gold?

Ans. Taxes on gold can involve various charges depending on the situation. These include customs duty on imported gold, Goods and Services Tax (GST) on purchase (applies to making charges, may vary), income tax on gold received as a gift exceeding Rs. 50,000, and capital gains tax when selling gold within 3 years of purchase.

Q7. Can I buy and sell gold without GST?

Ans. No, you'll usually pay GST on the making charges of purchased gold. However, the actual gold itself may be exempt.

Q8. How to sell gold without paying taxes?

Ans. Selling gold generally incurs capital gains tax unless exempt. To potentially qualify for exemptions, consult a tax advisor on how long to hold the gold before selling. In some cases, selling inherited gold or owning it for more than 3 years might qualify for tax benefits.

 Q9. How to buy gold without tax? 

Ans. Completely avoiding taxes on gold is tricky, but there are ways to minimize them. Look into tax limits for small purchases. Consider buying pre-owned gold, though capital gains tax might still apply. Explore tax-advantaged options like gold ETFs or Sovereign Gold Bonds (if available) that might offer tax benefits. 

 Q10. How does one remain informed about the latest tax regulations on gold?

Ans. Government websites or consulting a tax professional are the best ways to stay updated on current tax rules and potential changes affecting gold purchases and sales.