All that glitters is gold, especially since capital gains on debt funds, regardless of the holding period, will be taxed as short-term capital gains from April 1.
Currently, debt funds are subject to 20% capital gains tax with an indexation benefit if held for more than 36 months.
From April, investments in mutual funds with up to 35% exposure to domestic company stocks are likely to be taxed at the flat rate of investors’ income tax.
“Since gold funds or exchange traded funds (ETFs) and global funds also invest less than 35 per cent in Indian equities, these categories will also be subject to the same tax treatment as debt funds,” Naveen said Wadhwa, Deputy General Manager – R&D at Taxmann. publications.
As a result, holding gold in the form of Sovereign Gold Bonds (SGBs) or in physical form will be more tax efficient than investing in gold funds or ETFs (see graph), especially if you are in the highest tax brackets.
From April 1, gains from investments in gold funds will be taxed at the flat rate (say 30%), regardless of the holding period. On the other hand, investments in SGB, with a duration of 8 years, will be tax-exempt if the amount is withdrawn at the time of maturity. Additionally, in case of investment in physical gold, long-term capital gains after three years are taxed at 20% with the benefit of indexation. Short-term capital gains are added to your total taxable income and taxed according to your income tax bracket.
Please note that if you redeem SGB shares after 5 years of blocking or even before 5 years on the stock market, the tax treatment applicable to physical gold will also apply to SGB.
Thus, we can conclude that for a long period of holding gold, the SGB is the most efficient structure from a tax point of view, followed by physical gold and finally gold funds or ETFs.
That said, investments cannot be made solely based on a tax perspective. Investors in SGBs face liquidity problems if they wish to redeem their units before maturity. The same goes for physical gold. Additionally, physical gold transactions are subject to a 3% Goods and Services Tax (GST). For investors concerned about liquidity, gold funds or ETFs still perform well, according to Archit Gupta, founder and chief executive of Clear.
If the new amendments to the 2023 Finance Bill come into force as is, the tax on foreign direct equity investments will be lower than that on investments in global funds or funds of funds.
According to Sunil Gidwani, expert on domestic and international tax and regulatory issues at Nangia Andersen India, capital gains in case of foreign stocks held for more than 24 months (36 months for foreign ETFs) before selling them are taxed at a rate of 20% with indexation advantage. While gains from global funds are taxed at a fixed rate regardless of the holding period.
That said, any direct investment abroad will benefit from TCS (tax collected at source) at the rate of 20%. This is in line with the 2023 budget. Although this amount could be used to offset the total tax payable at the end of the year, part of the capital would be blocked until then.
Furthermore, those who cannot spare the time to invest in direct stock picking in the international market would be better off sticking to funds, regardless of the higher tax on gains.
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