Gold Taxability and its Holding Limits

Gold is the most favourite thing among the Indian households and world-wide. People purchase gold on various occasions such as marriage, festivals, functions etc. Gold can be in the form of bars, coins, ornaments etc. Gold is also a popular mode of investment these days due to higher stock market volatility. ( investors generally buy gold as a way of diversifying risk ). The Gold market is also subject to speculation and volatility like other markets.

This document covers

Different types of Gold
Permissible Limits
Taxability of Gold
Income Tax on Gold
Tax Saving on Sale of Gold

1. Different types of Gold Investments

Gold can be invested in multiple forms and below are the some of the forms.

Physical Gold: These can be invested in the form of jewellery, coins, bars or gold savings scheme.
Sovereign Gold Bonds (SGB):

These are issued by the Reserve Bank of India (RBI) under the Sovereign Gold Bond Scheme, 2015. This scheme is intended to reduce the demand for physical gold and consequently reduce the foreign exchange outflow due to import of gold.
These bonds are issued periodically by RBI and the bonds bear interest rate of 2.5% and interest will be credited semi annually to the investor and the tenor of bond is 8 years
Sovereign Gold Bonds helps in appreciation of capital and eliminates the risk of storage

Gold Exchange Traded Funds (ETF):

Gold ETF is a commodity based mutual fund that invests in assets like Gold. Gold ETF’s will be listed and traded on stock exchange and its functioning is similar to stocks
Gold ETF’s are units representing physical gold which may be in paper or dematerialized form. Gold ETF’s combine the flexibility of stock investment and simplicity of gold investments
Gold ETF’s require a demat account to invest

Gold Funds: Gold funds are type of mutual fund investments that invests in Gold or bullion. Gold funds can be invested without any demat account. Gold mutual funds are perfect hedge against inflation and ideal when the stock market is falling
Gold Derivatives: Gold derivatives are financial instruments whose prices are derived from physical gold. Gold Derivatives are of 2 types i.e., gold futures and gold options.
Digital Gold: Digital Gold was introduced in 2010 by NSE India to suit Indians who like to invest in gold in electronic form and can be converted into physical form when they need. Investors can invest even in fraction of amounts starting from Rs 1

2. Permissible limits for holding gold jewellery or ornaments

Acquired thru proper source of investment or will or inheritance:CBDT has clarified that there is no limit on holding of gold jewellery or ornaments if acquired from explained sources of income or through will or inheritance or gift. However, the income of the assessee should be inline with the gold held. Below is the documentation required

If purchased: Proper invoice for purchase of gold and the source of income for purchase of that gold should be explained
If acquired under inheritance or will: Will copy or Gift copy or other documents should be produced.

At the time of Search: Gold within the following limit will not be seized even at the time of search at the taxpayer premises. No proof is required for possession and investment for the following limit of gold.

Married Female – 500 Gms (1/2 Kg)
Unmarried Female -250 Gms (1/4 Kg)
Male member – 100 Gms

Note: The Income tax officer might decide to exclude a larger quantity of jeweller or ornaments from seizure with regard to the status of the family and the customs and practices of the community to which the family belongs

For Example

Mr Ram’s family consists of 4 members i.e, Mr Ram himself, wife Sita and un married daughter Lakshmi and son Krishna. Below is the limit of jewellery that his family should hold

Mr Ram – 100 gms, Mrs.Sita -500gms, Ms. Lakshmi-250 gms and Mr. Krishna- 100gms. The total jewellery should be 950 gms.

If Mr Ram and his family possess 1250 gms of jewellery and if there is any search conducted by Income Tax office, Mr Ram should submit the proper documentation for the additional 300 gms of jewellery.
If the explanation offered for 300 gms is not accepted by income tax officer, then the income tax officer will add the fair market value of 300gms jewellery to Mr Ram’s Income and Mr Ram is liable to pay taxes along with interest and penalty
If the single locker is having jewellery from multiple families, the above limit will be applicable to each individual taxpayer

3. Taxability of Gold and its various forms

Gold and its various forms are deemed to be a capital asset and the sale of these would attract capital gains tax.

Physical Gold/Gold ETF/Gold Mutual Fund/Digital Gold: Income on the sale of physical gold/Gold ETF/Gold Mutual fund/Digital Gold is taxable under the head “capital gains”

Long Term: If you sell the physical gold/Gold ETF/Gold Mutual fund/Digital Gold after 3 years of purchase, the gain on sale is considered as Long-Term capital gain and it is taxable @ 20% along with Indexation benefit
Short Term: If you sell the physical gold/Gold ETF/Gold Mutual fund/Digital Gold before 3 years of purchase, the gain on sale is considered as Short-Term capital gain and it is taxable @ slab rates.

Sovereign Gold Bonds (SGB): Sovereign Gold Bonds consists of interest and the amount invested. The taxability of them are as follows

Interest earned on Sovereign Gold Bonds is taxable at slab rates under the head Income from Other sources
Income on sale of SGB after the expiry of 8 years is tax exempted
If you sell the SGB after 3 years of purchase, then it is taxable as Long-Term capital gain and it is taxable @ 20% along with indexation benefit
If you sell the SGB before 3 years of purchase, then it is taxable as Short-Term capital gain and it is taxable @ slab rates.

Gold Derivatives: Income on the sale of gold derivatives is considered as non-speculative business and it is taxable @ slab rates. The taxpayer can also claim the expenses as it is treated under the head business

4. Income Tax on Gold received under Gift or Inheritance or Will

The taxability of gold received under gift or inheritance or will is as follows.

Received from the relatives: If the gold is received under inheritance or will or gift from the relatives specified under income tax, the receiver is not liable to pay any income tax on the receipt. If the receiver sells the gold in future, then he is liable to pay income tax on capital gains
Received from any other person: If the gold is received from any other person who is not an relative, then the recipient is liable to pay taxes @ slab rates if the gold received during financial year is more than Rs 50000 under the head Income from other sources.

Note: Gold received at the time of marriage is fully exempted under income tax whether from relatives, friends or any other persons

5. Tax Saving on Sale of Gold

Taxpayer having capital gains under short term cannot save taxes by reinvesting but if the taxpayer is having long term capital gain on sale of gold, then he can reinvest and save the taxes as follows.

Section 54F:

This section can be claimed either by individuals or HUF.
The taxpayer should purchase 1 residential house in India within 1 year before or 2 years after date of sale of gold or construct 1 residential house within 3 years from the date of sale of gold.
Quantum of Exemption:

If cost of new residential house ≥ Net Sale of Consideration of Gold, entire capital gains is exempt
If cost of new residential house < Net Sale of Consideration of Gold, only proportionate capital gains is exempt

The Taxpayer should not own more than one residential house on the date of sale. The Taxpayer should not purchase any residential house within 2 years or construct residential house within 3 years from the date of sale