Buying gold this Diwali? Options for investment and their tax implications

With increased digitisation and access to online platforms, gold investment is no longer confined to just gold coins, bars or jewellery. Today, the precious yellow metal can be purchased in many forms, including digital gold, Gold ETFs, or Sovereign Gold Bonds.

Whether you want to diversify your portfolio or celebrate the festive season by gifting gold, it's essential to understand the various investment options and their associated tax implications. 

Here are five popular options for gold investment:

Physical Gold: Buying physical gold, such as jewellery or gold coins, in India is a popular choice. You can invest in physical gold via gold bars, coins, or jewellery. While this allows you to have a tangible experience with your gold holdings, wear jewellery, and transport them as you wish, it also comes with the risk of theft and the need for additional security measures. 

Additionally, purchasing gold jewellery incurs making charges that are not recoverable when selling these items.

Gold ETFs (Exchange-Traded Funds): Gold ETFs are exchange-traded funds (ETFs) that aim to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. One Gold ETF unit is equal to one gram of gold and is backed by physical gold of very high purity. Gold ETFs are listed and traded on the exchanges like a stock of any company. 

Gold Mutual Funds: Gold funds represent a category of mutual funds that involve direct or indirect investments in gold reserves. These funds typically allocate investments towards gold-producing and distributing entities, physical gold holdings, and shares of mining companies.

These gold-focused mutual funds are open-ended and derive their unit values from the performance of the associated gold Exchange Traded Fund (ETF). Since the fund's value is closely tied to the prevailing price of physical gold, its performance is directly influenced by changes in the yellow metal's market price.

Here are a few gold funds: Invesco India Gold Fund- Direct Plan (Growth), SBI Gold Fund- Direct Plan (Growth), HDFC Gold Fund- Direct Plan, Kotak Gold Fund- Direct Plan (Growth), Axis Gold Fund- Direct Plan (Growth) and Nippon India Gold Savings Fund- Direct Plan (Growth)

Sovereign Gold Bonds (SGBs): Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold, serving as a substitute for physical gold ownership. These bonds are issued by the Reserve Bank on behalf of the Government of India, and investors pay the issue price in cash, with redemptions also in cash upon maturity.

SGBs bear interest at a fixed rate of 2.50 per cent per annum on the initial investment, credited semi-annually. On maturity, they are redeemed in Indian rupees based on the average closing price of gold in the previous 3 business days.

SGBs are issued in denominations of one gram of gold and in multiples thereof. The maximum limit varies by the investor's category, with individuals and HUFs having a limit of 4 kg per fiscal year and trusts having a limit of 20 kg.

Digital Gold: Digital gold is a virtual method of buying and investing in the yellow metal without physically holding the gold. You can buy it online through Paytm, PhonePe, or Stock Holding Corporation of India. 

Investing in digital gold offers several advantages, including the purchase of 24k gold certified as 99.5 per cent pure by government-licensed agencies. It also allows for convenient physical delivery to the buyer's doorstep, ensuring high liquidity with easy buy and sell options. 

“Depending on your preference, you could either buy physical bullion or in digital format. If you do not want the hassles of storage or have doubts about the purity of the physical gold then you can consider various other modes of owning gold through gold ETFs, or if you don’t have a trading and Demat account then via simple fund of funds which give exposure to gold ETFs,” said Anil Ghelani, Head of Passive Investments & Products, DSP Mutual Fund.

According to Adhil Shetty, CEO, Bankbazaar.com, digital gold appears to be the most sensible investment option in gold ahead of Diwali and Dhanteras. 

“You can choose from Sovereign Gold Bonds (SGBs), gold ETFs and mutual funds for market-linked returns. Besides appreciation, SGBs also offer annual interest to investors. Also, you can take loans using these Bonds as collateral,” said Shetty.

How different gold investments are taxed in India?

According to the provisions of the Income Tax Act, gold is considered a capital asset, and when you sell it, it becomes subject to capital gain tax. 

“Physical gold such as jewellery, bars and coins are taxed according to the holding period. For instance, the capital gains earned by selling physical gold within 36 months are short-term capital gains (STCG). It is added to one's taxable income and taxed according to the applicable income tax slab,” said Archit Gupta, Founder and CEO, ClearTax. 

If one sells physical gold after a holding period of 36 months, the capital gains are called long-term capital gains (LTCG), he added, it is taxed at 20.8 per cent (including cess) with the indexation benefit. 

“Indexation allows you to adjust the investment's purchase price after accounting for inflation, effectively reducing the tax outgo,” said Gupta. 

Digital gold is also taxed similarly to physical gold attracting capital gain tax, according to Gupta.    

Gold ETFs or gold mutual funds also attract long and short-term capital gains tax. 

“For example, if you hold an investment for more than 36 months, the long-term capital gains tax is taxed at 20 per cent (plus cess) after indexation on gold ETF investments. On the other hand, if the investor holds up to 36 months or less, it shall be treated as a short-term capital gain. The capital gain taxes are levied as per the applicable tax slab,” said Gurmeet Singh Chawla, Director, Master Capital Services.  

Another form of gold investment is Sovereign Gold Bonds, tax on this instrument is divided into interest portion and capital gain. 

The current interest rate on SGBs is 2.50 per cent per year on an initial investment, and the interest amount is declared under ‘Income from Other Sources’ during tax returns. 

“This interest is entirely taxable, depending on the tax bracket of the investor. For example, if you have an SGB of Rs 10,00,000, the total interest received during the year is Rs 25,000. This interest is entirely taxable as per the individual's tax slab. Suppose the tax bracket is 20 per cent plus surcharge and cess, then the tax liability will be Rs 5,000 plus surcharge and cess,” said Chawla from Master Capital Services. 

Further, if the SGBs are held until maturity, the capital gains are exempt from taxation. If the SGBs are transferred or sold before maturity, capital gains will be taxable according to the usual definition of short-term and long-term capital gains.