How will gold investments be taxed now? Which is the most tax-efficient?
Gold prices surged 18 per cent year-on-year (Y-o-Y) in the June quarter to $2,338.2 an ounce (oz), reaching a record of $2,427/oz. They were up nearly 13 per cent compared with the December 2023 quarter. India is the second-largest consumer of gold, after China. Indian households hold a whopping 25,000 tonnes of gold, according to a July 2023 World Gold Council report. That's more gold than even in some of the developed economies' coffers. The recent changes in capital gains tax for gold investments in India have significant implications for investors.
Key changes:
Short-Term Capital Gains: The holding period for short-term capital gains has been reduced from three years to two years. Gains realized within two years will now be added to taxable income and taxed at the applicable income tax slab rates.
Short-Term Capital Gains (Sold within 2 Years):
Scenario 1: An investor buys gold for Rs. 50,000 in 2022 and sells it for Rs. 60,000 in 2024.
Old Rule: The Rs. 10,000 profit would be added to taxable income and taxed at the applicable income tax slab rate.
New Rule: The Rs. 10,000 profit would still be added to taxable income and taxed at the applicable income tax slab rate.
Long-Term Capital Gains: The tax rate for long-term capital gains has been reduced from 20% to 12.5%. However, the indexation benefit, which allowed for adjusting the cost of acquisition based on inflation, has been removed.
Long-Term Capital Gains (Sold After 2 Years):
Scenario 1: An investor buys gold for Rs 50,000 in 2022 and sells it for Rs 70,000 in 2025.
Old Rule: The Rs. 20,000 profit would be taxed at 20%, but indexation benefits could reduce the taxable gain.
New Rule: The Rs. 20,000 profit would be taxed at 12.5%, but indexation benefits are no longer applicable.
Impact of Indexation Benefit:
Example: If the inflation rate between 2022 and 2025 is 5%, the cost of acquisition would be adjusted to Rs. 52,500 (Rs. 50,000 * 1.05). This would have reduced the taxable gain to Rs 17,500 (Rs. 70,000 - Rs. 52,500).
Under the new rule: The taxable gain would be Rs 20,000, resulting in a higher tax liability.
Impact on investors:
Short-Term Holding: The reduction in the holding period for short-term capital gains is unlikely to affect many investors, as physical gold is typically held for long-term investment.
Long-Term Tax: The lower tax rate for long-term capital gains is a positive development for investors holding gold for more than two years. However, the removal of indexation benefits will increase the effective tax burden.
"Although a shorter holding period might benefit some investors, removing the indexation benefit will lead to a higher tax liability," said Sebi-registered financial advisor Value Research in a note.
Gold mutual fund taxation changes
Short-term capital gains:
Old rule: If the units were sold within three years of purchase, the gains were added to the taxable income and taxed at the applicable income tax slab rates.
New rule: If the units were bought between April 1, 2023, and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates (irrespective of the holding period).
"If the units are purchased after March 31, 2025, and sold before two years, the gains will be added to the taxable income and taxed at applicable income tax slab rates.Remark: A shorter holding period will promote medium-term investments," said Value Research in a note.
Long term- capital gains
Old rule:If the units were purchased before March 31, 2023, and sold after three years, 20 per cent tax on the gains was applicable, along with indexation benefit.If the units were purchased after April 1, 2023, the gains were added to the taxable income and taxed at the applicable income tax slab rates.
New rule: If the units were purchased between April 1, 2023 and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates (irrespective of the holding period).If the units are purchased after March 31, 2025, and sold after two years, 12.5 per cent tax on the gains will be payable without the indexation benefit.
"A shorter holding period will make buying mutual funds slightly more beneficial but the loss of indexation benefit will increase the tax liability upon sale," noted Value Research.
Gold ETF Taxation Changes: Decoded
Short-Term Capital Gains (Holding Period Less Than 12 Months):
Old Rule: The gains on selling Gold ETF units within 3 years were added to your taxable income and taxed at your income tax slab rate (e.g., 10%, 20%, 30%).
New Rule:
Transition Period (April 1, 2023 - March 31, 2025): If you bought Gold ETF units during this period, any gains you make on selling them before they complete 12 months are taxed at your income tax slab rate, regardless of the holding period.
Post-Transition Period (After March 31, 2025): If you buy Gold ETF units after March 31, 2025, and sell them before they complete 12 months, the gains are again taxed at your income tax slab rate.
Key Point: The introduction of a specific 12-month holding period for short-term capital gains on Gold ETFs is a major change. Previously, any sale within 3 years was considered short-term.
Long-Term Capital Gains (Holding Period 12 Months or More):
Old Rule: Gains from selling Gold ETF units after 3 years were taxed at a flat 20%, but you could benefit from indexation, which adjusts the cost price based on inflation and potentially lowers your taxable gain.
New Rule: Gains from selling Gold ETF units after 12 months are taxed at a lower rate of 12.5%. However, the indexation benefit is no longer available.
Impact on Investors:
Short-term investors: If you plan to hold Gold ETFs for less than a year, the new rules could potentially increase your tax burden compared to the old regime.
Long-term investors: You benefit from a lower tax rate (12.5% vs. 20%). However, the loss of indexation might slightly offset this benefit, especially if inflation remains high.
SGBs (Sold in the secondary markets)
Short-term capital gains
Old rule: If the bonds were sold within three years: the gains were added to the taxable income and taxed at the applicable income tax slab rates.
New rule: If the bonds are sold within 12 months, the gains will be added to the taxable income and taxed at the applicable income tax slab rates.
Impact: "The reduction in holding period may benefit short-term investors in SGB," said Value Research in a note.
Long-term capital gains
Old rule: If the bonds were sold after three years, a 20 per cent tax on gains would be payable with the benefit of indexation.
New rule: If the bonds are sold after 12 months, a 12.5 per cent tax on gains will be applicable, without the benefit of indexation.
Taxation on Redemption to RBI:
Old Rule: No tax was payable on SGBs redeemed to the RBI at maturity or during the pre-mature buyback windows offered by the government.
New Rule: There is no change to the taxation rules. You will still not pay any tax if you redeem your SGBs to the RBI at maturity or during the pre-mature buyback windows.
Pranit Mathur of Value Research decodes the best option for investors:
For long-term investors, Sovereign Gold Bonds (SGBs) held until maturity or sold to the Reserve Bank of India (RBI) remain the best option. The gains are 100 per cent tax-free.
For medium-term investors, gold ETF has become slightly more attractive. Now, if a gold ETF is sold after 12 months, the gains will be considered long term and will be taxed at 12.5 per cent, albeit without indexation. Previously, one needed to hold the same investment for three years before being subjected to a 20 per cent tax with indexation.
Physical gold still remains unfavourable due to the high holding cost and making charges.
Source: https://www.business-standard.com/