Income Tax on Gold: How much Tax is paid on Sale and Purchase of Gold

Gold has held significant cultural and traditional importance for centuries, and its value as an investment continues to rise due to consistent price growth in recent years. Gold is a popular choice for portfolio diversification, offering a dependable return over time. In the fiscal year 2021-22, India’s gold imports were valued at $46.14 billion, reflecting a 33.34% increase from the previous year. With such demand, it’s essential to understand the tax implications when buying or selling gold. Let’s dive into the key tax considerations!

Taxes on Physical Gold Purchases

When buying or selling physical gold, whether in the form of jewelry, coins, or bars, several taxes come into play:

1. Customs Duty: India imports a significant portion of its gold. To manage this, a customs duty is imposed. Currently, the Government of India (GOI) has reduced the customs duty on gold bars from 12.5% to 10%. This is combined with Goods and Services Tax (GST), bringing the final tax to 10% plus a flat 3% GST.
2. Agriculture Infrastructure Development Cess (AIDC): The GOI also levies a 5% AIDC on imported gold. Adding this to import duty and GST brings the total tax on gold to approximately 18%.
3. GST on Physical Gold: A 3% GST is applied on physical gold purchases, passed on to the customer by the jeweler. For example, if you buy gold worth ₹1,00,000, after adding customs duty and AIDC, GST will be calculated on the new total, resulting in an additional cost.
4. Making Charges and GST: Making charges, which cover crafting gold into jewelry or coins, attract a 5% GST. For example, assuming making charges of 8% on ₹1,00,000 worth of gold, a 5% GST on making charges will add to the final cost.
5. Tax Deducted at Source (TDS): For purchases exceeding ₹1 lakh, a 1% TDS is applicable, which can be adjusted against the buyer’s annual tax liability.

Taxation on Selling Physical Gold

1. Short-term Capital Gains (STCG): If gold is sold within three years of purchase, the profit is added to the seller’s income and taxed according to their income slab. For those in the 30% tax bracket, the gains will be taxed at 30%.
2. Long-term Capital Gains (LTCG): Gold sold after three years qualifies for LTCG, taxed at 20% with indexation benefits (adjustment for inflation). Indexation helps reduce the tax burden by considering inflation’s impact on the original purchase price.
3. GST on Jewellery Exchange: Exchanging gold jewelry does not attract GST if the exchange involves an equal quantity of gold. However, GST may apply on the difference in making charges or additional fees during the exchange.

Taxation on Digital Gold

Digital gold follows the same taxation rules as physical gold. While the method of purchase differs, taxes on capital gains are identical. The purchase of digital gold is subject to a 20.8% LTCG tax, with indexation benefits for long-term holdings.

Sovereign Gold Bonds (SGBs)

SGBs offer a tax-efficient way to invest in gold with several benefits:

1. Short-term Capital Gains: If sold within three years, the gains are taxed according to the investor’s income tax slab.
2. Long-term Capital Gains: If held for more than three years, LTCG applies, taxed at 20% with indexation or 10% without indexation. However, if SGBs are held until maturity (8 years), LTCG is exempt.
3. GST and TDS: SGBs are considered securities and are exempt from GST. Additionally, no TDS is applicable for SGB investments.
4. Interest Income: SGBs offer a 2.5% annual interest, which is taxable under the investor’s applicable income tax slab.

Taxation on Paper Gold (Gold ETFs and Mutual Funds)

Paper gold, such as gold ETFs and mutual funds, offers the following tax structure:

• Short-term Capital Gains: Taxed according to the investor’s income slab.
• Long-term Capital Gains: Taxed at 20.8% with indexation.

Tax on Gold Gifts or Inheritance

Gifts or inheritance of gold from close family members (such as parents, spouses, or children) are exempt from income tax under Section 56(2) of the Income Tax Act. However, gifts exceeding ₹50,000 from non-relatives are taxable as “Income from Other Sources.”

If the gifted gold is sold later, the capital gains tax applies depending on the duration of holding.

Tax for NRIs Buying or Selling Gold

NRIs face similar tax rules as residents but cannot invest in SGBs. TDS applies to gold ETFs or mutual fund redemptions, with 30% TDS for short-term gains and 20% for long-term gains.

Conclusion

Investing in gold, whether physical, digital, or paper gold, involves understanding the tax implications. SGBs provide a tax-efficient option, especially for long-term holders, while digital gold offers convenience and secure storage. Always consult a tax advisor for personalized advice, particularly when dealing with gifts, inheritance, or NRI tax considerations.

FAQs

How much gold is exempt from income tax?
Gold received as a gift from close family members is tax-exempt. However, any sale may be subject to capital gains tax.

What is the income tax on selling personal gold jewelry?
Short-term gains (within 3 years) are taxed as per your income slab. Long-term gains (after 3 years) incur a 20.8% tax with indexation.

Is digital gold more expensive than physical gold?
Digital gold has management fees, but it eliminates storage costs. Physical gold might have additional costs such as making charges and customs duty.

How much gold can I keep at home with proof?
Married women: up to 500 grams; unmarried women: up to 250 grams; men: up to 100 grams.

How to buy gold without paying tax?
While avoiding all taxes is difficult, consider tax-efficient options like SGBs or holding gold for long-term capital gains benefits.