Gold investments are one of the most reliable kinds of investments. It can be done differently, including investment in physical gold, digital gold, gold derivatives, or paper gold. In each of these gold investments, the taxation returns differ individuals who acquire physical gold face different tax obligations than those who invest in digital gold.
Types of gold investments
As mentioned above, there are four ways to invest in gold.
Physical gold: Investing in physical gold is standard for ages. Here, you acquire gold in the form of jewelry, bars, or coins. You are in charge of keeping it secure in this location.
Digital Gold: This is Gold investment in digital form through various online applications or websites. Here, the seller secures the gold you invested.
Derivative Contracts: in simple terms, derivative contracts are gold investments as a commodity. These have their own set of tax rules, and companies get these offers.
Paper Gold: On paper, you possess a certain quantity of gold, but not literally. Paper gold investments include sovereign gold bonds (SGB), mutual funds, and exchange-traded funds (ETFs).
TAXATION ON PHYSICAL GOLD
Physical gold sales are taxed based on the extent of gains, such as short-term and long-term capital gains. Short-term capital gains require an investor to sell assets within 36 months of purchasing them. The returns are long-term capital gains after three years. In addition, the profit from a gold sale for short-term capital gains is added to the investor’s yearly income and taxed at their applicable income tax rate.
In the event of long-term capital gains, investors must pay 20% of the profits in taxes, plus any surcharges, as well as a 4% cess with indexation advantages. When purchasing actual gold, the Goods and Services Tax (GST) is also applicable.
TAXATION ON DIGITAL GOLD
Digital gold investment is taxed the same way as physical gold concerning gains. Digital gold is the most recent investment strategy that has lately gained popularity, particularly among young people. Rupee one is the minimum amount for digital gold investments. Long-term capital gains from digital gold are subject to a 20% tax rate, as well as a 4% cess and surcharge. Returns on digital gold kept for less than 36 months are not taxed directly. If the investor wants to convert the digital gold into hard cash after four or five years, they will have to pay these fees. However, to determine the amount of taxes an investor must pay, we should consider the ownership period of digital gold.
TAXATION ON DERIVATIVE CONTRACTS
A few derivative contracts include gold as commodities. These commodities are taxed differently and are primarily available to companies. When a company’s entire annual revenue is less than Rs 2 crore, 6% of the profits are taxed. Taxation on derivatives contracts can be claimed as company income, lowering the tax burden associated with such transactions. To exploit the advantages under Section 44AD of the Income Tax Act, you must keep meticulous records of your company’s finances.
TAXATION ON PAPER GOLD
Long-term capital gains taxes are 20% + 4% less if you buy gold through mutual funds or ETFs.
Short-term investors (those who hold their investments for less than 36 months) will not be subject to direct taxation on their profits. However, to assess the tax, join their other incomes with this income and taxed as per appropriate slabs. This type of taxation is similar to physical gold investments.
If you invest in SGB, you will receive 2.5% each year in return. Interest earnings are classified as other forms of income and are taxed appropriately. Any profits you make after investing in SGB for eight years are tax-free. Another essential aspect to note is that in the event of a premature withdrawal, different tax rates apply to SGB returns. The majority of SGB products have a 5-year lock-in duration. All profits from such transactions are regarded as long-term capital gains (20 percent tax + 4% cess + surcharge) if you sell the assets after this time and before they reach maturity.
Gold is a dependable investment but is not risk-free. Based on the type of gold you invest in, the taxation in gold investments differs. However, the tax on physical gold is similar to few other modes of gold investments.