Page 12 - Bullion World Volume 04 Issue 08 August 2023

Bullion World | Volume 3 | Issue 8 | August 2023

Taxation Challenges for Gold ETFs in India

Mr Harish Chopra, Vice President & Head, India Gold Policy Centre at IIM Ahmedabad

The Finance Bill 2023 introduced a Market Linked Debentures (MLDs) in
crucial amendment to the taxation of this manner.
Gold ETFs. Any gains derived from
the transfer, redemption, or maturity The implications of this change are
of units from a Specified Mutual significant, particularly for investors
Fund acquired on or after 1st April who wish to avail tax benefits over
2023, regardless of their holding an extended investment horizon.
period, would be treated as short- With this amendment in effect, the
term capital gains. "Specified mutual lower taxation advantage or benefit
fund" refers to a mutual fund where of indexation for holding units over
not more than 35% of its proceeds a longer tenure in Debt-oriented or
are invested in the equity shares of Hybrid Mutual Funds with equity
domestic companies. exposure of up to 35%, acquired
after the specified date i.e. 1st April
It is worth noting that the earlier 2023, will no longer be accessible,
version of the Finance Bill 2023, as prompting investors to reevaluate Mr Harish Chopra
presented in the budget, only treated their mutual fund strategies.

The following table summarises the taxation provisions of Mutual Funds effective from 1st April 2023:

Exposure to equity Taxation of Capital Gains
At least 65% Short-term (held for less than one year) - 15%
(Equity-oriented Funds or aggressive
Hybrid Funds) Long-term (held for more than one year) - 10% beyond Rs. 1 lac
Between 35% to 65% Short-term (held for less than three years) - as per tax slab
(Balanced Hybrid Funds)
Long-term (held for more than three years) - 20% with indexation benefit
Less than 35% (Debt Funds or conservative Tax treatment at par with short-term, irrespective of its period of holding, and taxed
Hybrid Funds) at slab rate

The amendment's primary objective an efficient asset class while also world's gold consumption annually.
was to bring debt-oriented mutual aiding policymakers in their objective With this amendment in capital
funds in line with the taxation of financialising gold and enhancing gains taxation, investors seeking
structure applicable to fixed a better tax compliance structure. gold-based investment products
deposits. However, this change Gold ETF is an effective way of as portfolio diversifiers will have
inadvertently impacts certain investing in gold and is a favoured fewer options at their disposal. The
specific mutual fund schemes, such option for investors looking to invest alternatives, such as digital gold (yet
as Gold ETFs. Unfortunately, from in gold as a portfolio diversifier. Fund to be regulated) or sovereign gold
the taxation point of view, gold ETFs Managers now face the challenge bonds (SGB) (less liquid compared
are categorised under debt-oriented of including at least 35% equity to gold ETFs), have their own
funds and taxed accordingly. Strictly investments in Gold ETF schemes to limitations. The Govt. is going slower
speaking, taxation of Gold ETFs preserve the long-term tax benefits. in issuing new series of SGBs. In
cannot be considered at par with a However, this compromises the the FY 2022-23, only four series of
debt fund as the underlying asset in fund's diversification benefits, and SGBs were issued as against ten
Gold ETF is physical gold and not a the Gold ETF loses its fundamental series in 2021-22 and 12 series a
debt instrument. As a result, taxing characteristic. year before.
Gold ETFs differently from their
underlying asset, i.e., physical gold The Indian Gold ETF segment A thoughtful reassessment of
lacks a clear rationale. constitutes less than 1% of the the taxation framework may
global ETF market, despite India be necessary to develop gold
Gold ETF has the potential to play being a significant importer of gold, investment products in India.
a pivotal role in developing gold as accounting for nearly 20% of the

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