Caught in the LIFO Trap: Why Jewellers Are Now on the I-T Radar?

As gold prices continue to rise sharply in India, the Income Tax (I-T) Department has turned its focus on jewellery businesses suspected of using unfair accounting methods to lower their tax bills. Some jewellers are believed to have manipulated their inventory valuation methods to show lower profits and pay less tax.

Have You Also Unknowingly Made This Accounting Mistake?

The main issue lies in the use of the LIFO (Last-In, First-Out) method to value closing stock. This method is not allowed under Indian tax laws since 2016-17, following the introduction of ICDS II (Income Computation and Disclosure Standards).

Jewellers are supposed to use FIFO (First-In, First-Out) or the weighted average cost method. But in a bid to save taxes, some shifted to LIFO. This allowed them to show lower closing stock values, which directly reduced their reported profits.

For example, under FIFO, older and cheaper gold is considered sold first, so the remaining stock reflects costlier recent purchases. This raises the closing stock value and, in turn, profits. LIFO, on the other hand, assumes the costlier gold is sold first, leaving cheaper gold in stock—thus reducing profits and taxes. 

How Big is the Problem for the Income-Tax Department?

According to sources, this practice has been going on for 5–6 years. In one case, a major jewellery firm had to pay nearly ₹100 crore in taxes on underreported earnings. Now, the I-T Department has instructed officials to identify more such cases and ensure strict compliance.

Is it Still Legal for Jewellers to use the LIFO Method?

Some jewellers had earlier challenged the rules around inventory valuation, asking for permission to use LIFO. However, courts upheld the legality of ICDS II and confirmed that LIFO is not a valid method for valuing interchangeable inventory items like jewellery.

Why Does This Matter?

With gold prices jumping from ₹31,000 per 10g in 2018 to nearly ₹97,681 in 2024, valuing inventory correctly has become critical. Many jewellers may have found the LIFO method tempting due to its tax advantages, especially in a rising gold market.

Read more: Will You Pay More Tax in 2026? Here’s the Truth Behind the Viral Claims.

Conclusion

The I-T Department's crackdown shows the importance of following accounting standards and tax laws strictly. Jewellers must ensure consistency and transparency in how they value inventory. For everyday investors too, understanding such practices is important, especially those holding gold-related assets in their demat accounts. As regulators tighten their grip, businesses would do well to stick to fair practices and avoid shortcuts.

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