Tax on Gold Investment in India

Gold has always been a popular investment option for investors. The yellow metal has been used as a store of wealth and a medium of exchange throughout history.

However, in the past few years, there has been a global surge in gold prices due to the global economic slowdown and rising inflation.

With the increase in gold prices, investors are now looking at investing in gold as an investment option. This has increased demand for gold-related products, including gold ETFs and gold mutual funds.

These products provide an easy way to invest in gold without taking possession of physical gold.

In this blog, we will discuss taxation on different types of gold investments like physical gold, digital gold, paper gold, and Gold derivatives.

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Different Types of Gold Investments in India

Physical Gold

If you want to buy physical gold, then there are several options. You can choose between bars and coins, which are available in a wide range of sizes and weights. There is also jewellery, which can be bought directly from the manufacturer or a jeweler.

Digital Gold

Another way to invest in gold is through digital options like exchange-traded funds (ETFs). These are typically traded on stock exchanges just like stocks, bonds, and mutual funds but instead, represent shares in physical assets such as oil or gold bullion stored in vaults somewhere else in the world.

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Derivative Contracts

Derivative contracts are agreements between two parties to purchase or sell something at a future date for an agreed-upon price.

Derivative contracts are used to hedge risk and speculate on future prices by buying or selling gold contracts before they expire.

Paper Gold

The most common type of derivative contract is paper gold. Paper gold refers to trading on futures exchanges without taking possession of gold itself.

Paper gold also includes options that give buyers or sellers the ability to buy or sell futures contracts at a specified price within a specified period of time.

Tax on Gold Investment in India

Tax on Physical Gold Investment

Any individual who sells physical gold will be subject to a 20% tax rate and 4% cess on LTCG(Long-term capital gain).

If you sell gold within three years of buying it, it is considered short-term; if sold after three years, it is considered long-term.

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Tax on Digital Gold

If you sell your digital gold after holding it for less than three years, then you will be taxed at applicable income tax slab rates. However, if you hold your digital gold for more than three years, then long-term capital gains tax is applicable on selling it at 20.8% (including cess) with the indexation benefit.

The easiest way is by buying shares of an exchange-traded fund (ETF) which tracks some measure of gold prices, such as GLD or GDXJ.

But these ETFs don't always track real physical gold and may use futures contracts instead, which may not always be liquid enough to trade easily.

Tax on Gold Derivatives

In India, the taxation of derivative contracts is quite a complicated process. It involves several aspects such as capital gains tax, dividend distribution tax, and income tax.

When a company's annual revenue is less than Rs 2 crore, 6% of the profits are taxed. Taxation on derivatives contracts can be claimed as company income, lowering the tax burden associated with such transactions.

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Tax on Paper Gold

Long-term capital gains taxes are 20% + 4% less if you buy gold through mutual funds or ETFs.

If you buy physical gold and then sell it, you will have to pay long-term capital gains tax on the profit. The long-term capital gains tax rate is 20% + 4% less if you buy gold through mutual funds or ETFs.

However, if you sell the physical gold after holding it for more than one year, that transaction would be considered a long-term capital gain and taxed at 20%.

Final Note

Gold is considered to be the most valuable commodity in terms of its weight, purity, and durability.

The value of gold has been recognized since ancient times, which is why it has always been considered a storehouse of value by people from all over the world. Several countries have allowed their citizens to invest in gold as a way to save for the future.