Planning to buy or invest in gold? Understand the tax consequences first

Gold investment in festive season: Considering buying and investing in gold during this festive season? Experts emphasise the importance of understanding the tax consequences associated with gold investments and gifts.

"When you sell gold or silver, you may be subject to Capital Gains Tax (CGT) in India. This tax is based on the profits made from selling a capital asset like gold. The holding period determines the nature of the gain," Naveen Wadhwa, Taxation Expert explains.

"Selling within three years results in Short-Term Capital Gains (STCG), taxed according to your income tax slab rate. If you hold for over three years, it's considered Long-Term Capital Gains (LTCG) and taxed at a fixed rate of 20 per cent, with the benefit of indexation," Wadhwa added.

Indexation helps reduce your capital gains tax by accounting for inflation's impact on your investment's cost. You need to track the Cost Inflation Index (CII) for the year you acquired your gold or silver. This index is published annually by the Central Government.

Various ways to invest in gold

Sovereign Gold Bonds (SGBs)- These digital alternatives to physical gold are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They offer tax efficiency, with no LTCG when held until maturity.

Gold Exchange-Traded Funds (ETFs) These tradable units of gold can be bought on stock market exchanges, mirroring the price of physical gold or the gold mining portfolio. There's no mandatory lock-in period, but watch out for brokerage charges and fees.

Gold Mutual Funds- Investing in these funds means putting your money into a fund dedicated to gold and gold-related assets. Be aware of costs like the expense ratio and transaction fees, as the value of your investment can fluctuate.

Physical gold Gold can be easily converted into cash, providing liquidity, but there's no guarantee of retaining the same level of gains upon liquidation.

Tax Implications

• SGBs offer tax efficiency, but selling within three years results in STCG, taxed at 30 per cent.
• Gold jewelry is exempt from capital gains tax when sold, but you may pay Goods and Services Tax (GST) on making charges.
• Gold ETFs and mutual funds are taxed as equity capital gains.
• Gold gifts from close blood relatives are not subject to taxation, while gifts from non-relatives may fall under the Gift Tax Act and could be taxable.