Explained: Capital gains on sale and purchase of gold

Today, an individual can buy gold in many forms - physical, digital, exchange-traded fund, and sovereign gold bonds. The taxation of such instruments could vary, says Tinesh Bhasin.

When you give old ornaments to a jeweller to buy new ones, you might need to pay capital gains tax depending on how the transaction is structured.

Such a transaction can happen in two ways.

One, the jeweller uses the existing gold from the customer to make new jewellery and bills the individual only for the making charges.

Second, the jeweller will value the jewellery. The customer can then purchase a new set of the same value or pay the difference between new and old jewellery.

In the second case, where the jeweller would issue a new bill for a fresh purchase, the consumer will need to pay tax.

“This is akin to a person selling old gold jewellery and buying anew. Most individuals are not aware that such a transaction could be taxable, depending on the invoice,” says Naveen Wadhwa, a chartered accountant with Taxmann.

Today, an individual can buy gold in many forms -- physical, digital, exchange-traded fund (ETF), and sovereign gold bonds (SGBs).

The taxation of such instruments could vary.

In the case of physical gold, for example, if a person has held the gold for over three years, and then sells it, he would need to pay long-term capital gains (LTCG) tax, which is chargeable at 20 per cent after taking indexation benefit.

“If the jewellery sold was bought before April 1, 2001, then the taxpayer can use the gold price as on April 1, 2001.

"For 24-carat gold, the price was Rs 4,190 per 10 grams,” says Wadhwa.

If physical gold is sold within three years of purchase, short-term capital gains (STCG) tax can apply.

The gains are added to the income and taxed according to the individual’s tax slab.

Digital gold is the latest way to accumulate gold.

Many mobile wallets such as Paytm, MobiKwik, and PhonePe have tied up with MMTC-PAMP or Safe Gold for buying and selling of the yellow metal.

The taxation of digital gold is the same as that of physical gold.

Gold ETFs invest in physical gold, and gold mutual funds invest in gold ETFs.

Both mirror the price movement of physical gold.

The taxation and exemption rules for them are the same as for physical gold.

When it comes to SGBs, the taxation will vary depending on whether the individual holds the bonds until maturity or sells them midway.

SGBs come with a maturity period of eight years, with an exit option from the fifth year.

SGBs are also traded on stock exchanges, offering an early exit option for investors.

The bondholder also earns an annual interest.

The interest on gold bonds is taxable.

It is added to the income of the bondholder.

The capital gain arising on redemption of these bonds to an individual is not taxable, according to the regulations.

The benefit, however, is not available if the bonds are transferred from one person to another before maturity.

In such a case, the gains will be considered as capital gains.

The long-term capital gain arising on such a transfer will be chargeable at 20 per cent with indexation, and short-term capital gain is added to the income of the bondholder.

Photograph: Reuters.