Are you looking to gift or invest in gold this holiday season? Beware of tax implications

The ways of giving gifts during festivals have changed. However, not all have succumbed to the glitzy new age gifting styles chosen and decided based on marketing gimmicks and easy gifting options. However, some people still prefer old-school thinking when it comes to giving and receiving gifts of gold and silver. As our elders say: “Trends may change but values ​​never change”. Each day of the festival, starting from the beginning of Navaratris and extending till Diwali, overflows with deep meaning and symbolism.

Gold is a preeminent symbol in Indian culture, held in high esteem for its exquisite allure, pristine purity and enduring value. With a history spanning centuries, gold has become an indispensable part of Indian heritage. There is no doubt that gold holds a unique and valuable place in the hearts of the Indian population, which explains the widespread practice of buying and investing in gold and silver during festive occasions.

Before making a decision, it is essential to understand the tax consequences of investing in gold and silver. Here are some key tax factors to consider:

Capital gains tax: Investments in gold and silver are subject to capital gains tax (CGT) in India. CGT relates to the tax levied on profits obtained from the sale of real estate, such as gold or silver. To determine the nature of the gain, the retention period is set at three years. If you sell your gold or silver within three years of purchase, any resulting profit falls into the category of short-term capital gains (STCG). The STCG is taxed according to your applicable income tax rate. On the other hand, if you sell your gold or silver after a holding period of more than three years, any profit generated is classified as long-term capital gains (LTCG). LTCG on gold and silver is subject to a fixed rate of 20 percent, with the added benefit of indexation.

Indexing Advantage: The indexation benefit serves as a method of reducing your capital gains tax liability by offsetting the impact of inflation on the cost of your investment. Essentially, this approach ensures that you are taxed only on the actual profits made, taking into account the erosive effects of inflation. To avail the indexation benefit, you need to keep an eye on the Cost Inflation Index (CII) of the year in which you acquired your gold or silver investment. The CII is published annually by the central government.

How many ways can you invest in gold?

Investing in gold or gifting gold investments to your loved ones is a great way to celebrate festivals. With so many ways to invest in gold, including bullion, sovereign gold bonds, gold exchange traded funds (ETFs), and mutual funds, Indians will always find a way to invest or gift each other during festivals. However, purchasing and owning them has tax implications that you should be aware of.

Sovereign Gold Bonds (SGB): Sovereign Gold Bonds (SGB) represent a digital alternative to traditional investments in physical gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are available in various denominations based on grams of gold. SGBs are actively traded on stock exchanges.

To participate in SGBs, investors must make a cash payment to an authorized broker regulated by the Securities and Exchange Board of India (SEBI). On maturity, the invested amount is redeemed and deposited into the investor’s designated bank account.

Gold Exchange Traded Funds: Gold exchange-traded funds represent units of gold that are tradable on exchanges. Similar to mutual fund shares, ETF shares can be purchased for trading on a stock exchange. To start your gold ETF investment journey, you need to select a brokerage firm of your choice and start trading using your demat account.

Depending on the investment firm, the ETF reflects either the price of physical gold bullion or the underlying portfolio of shares of gold mining and refining companies. Notably, there is no mandatory lock-up period, allowing you to enter and exit your investment at your convenience. However, it is essential to be aware of applicable brokerage fees and processing fees.

Gold Mutual Funds: Purchasing shares in a gold UCITS involves investing in a fund dedicated to gold and gold-related assets. The fund manager is responsible for executing asset transactions in accordance with the fund’s investment strategy. Notable companies offering gold mutual funds include Invesco India Gold Fund, SBI Gold, Nippon India Gold Savings Fund, DSP World Gold Fund Quantum Gold Savings, IDBI Gold Fund, Kotak Gold and several others.

These mutual funds are sensitive to market fluctuations, meaning the value of your investment may increase or decrease. Additionally, investing in gold mutual funds has associated costs, including expenses such as expense ratio and transaction fees.

Physical gold: Gold can be easily converted into cash with great convenience, a process that can be done on a global scale. Once liquidated, its value remains consistent with its solid form, making it an exceptional investment option that provides the flexibility to access liquidity when needed. Unlike some other investments, there is no guarantee that you will retain the same level of gains upon liquidation. Gold enjoys remarkable liquidity, as it is readily accepted by almost any bullion dealer around the world willing to purchase it. Whether it’s a local coin store, an individual, or an online dealer, there are many ways to sell it in exchange for cash or other items.

Tax Implications of Investing in Gold

Depending on your gold investments, you should know how your donations, investments and income from them would be subject to tax.

Taxation of SGB: Those who have purchased SGBs need not worry about tax implications as these bonds offer tax efficiency, LTCG free when held to maturity. However, if you choose to sell or repurchase your SGB within three years of their acquisition, any capital gain generated will be classified as STCG. The STCG of SGBs is subject to a tax rate of 30 percent (plus any applicable surcharge and tax). This tax is calculated as the difference between the sale price and the initial issue price of the SGB, less any indexation advantages.

Interest accrued on these bonds is taxable as income from various sources. The specific tax rate applicable to interest income is determined by the individual’s income tax bracket. Additionally, there is no tax withheld at source (TDS) imposed on interest income from SGBs. Investors deciding to sell or repurchase their SGBs through an exchange must pay the Securities Transaction Tax (STT), which amounts to 0.1 percent of the sale value.

Taxation of gold jewelry and ornaments: In India, gold jewelry is classified as personal property and is exempt from capital gains tax when sold. Therefore, there is no tax to pay on the income earned from the sale of your gold jewelry. However, when purchasing gold jewelry, you may be liable for Goods and Services Tax (GST) on manufacturing or manufacturing costs. The GST rate on gold jewelry differs from state to state, but it is generally around 3 percent of the manufacturing charge. GST only applies to the manufacturing or manufacture of gold jewelry and does not apply to the actual value of the gold.

Taxation of gold ETFs and mutual funds: In India, gold ETFs and gold mutual funds are classified as equity mutual funds for tax purposes. Therefore, profits generated from the sale of gold ETFs and mutual funds are subject to stock capital gains tax.

Capital gains on stock investments are divided into two main categories: short-term capital gains and long-term capital gains. Short-term capital gains are taxed at the individual’s current tax rate, while long-term capital gains are subject to a 20 percent tax rate, with the possibility of benefiting of indexing.

Gold ETFs and mutual funds are eligible for indexing benefits to reduce taxable capital gains. Indexing takes into account inflation that has occurred since the date of acquisition of these ETFs or mutual funds. Therefore, this results in an increased effective cost basis for these gold investments, which is used when calculating capital gains.

Taxation of gold gifts received: In India, gold received as a gift from close relatives is not taxable. However, if the gold is received as a gift from unrelated persons, it falls under the Gift Tax Act, 1958 and is subject to tax. The law provides an exemption for gifts received from blood relatives.

Before you decide to buy or invest in gold and silver this festival season, know how much you will have to spend to pay taxes on these investment opportunities.