Turbulent economy that we see these days due to COVID-19 mandate us to re-orient towards the new normal. Gold is very commonly hedged against the uncertainty in the capital markets, covers ways, means and the impact on your taxes.
When the going gets tough, the tough get going .. while uncertainty is not new to capital markets in the past two decades it all depends on one's ability to steer into the right direction.
Turbulent economy that we see these days due to COVID-19 mandate us to re-orient towards the new normal. While GOLD is not new to Indian investor or household, various instruments that were available in investing gold makes you well aware of pros and cons before investing and complications with the capital gains arise at the time sale or redemption of such.
Gold is very commonly hedged against the uncertainty in the capital markets. Even Governments do buy gold to make their economy afloat. One must pay attention towards this asset class in saving their fortunes during these tough times.
Gold in India is a Capital Asset and is most favoured asset to buy in the form of jewellery during festive seasons and weddings, and pass it on to generations. While buying Gold one must pay GST (3% GST), when selling the same to another prospective buyer or a shop, the gain from the sale is taxed from the income tax perspective.
Before GST came into picture (before Jul 2017), The tax on Gold was at 1% Service Tax, and 1% VAT, a total of 2% Tax at the time of buying. Post GST the same was increased from 2% to 3%.
The Capital gains arrived from the Sale of Gold is taxed as per the Income Tax Rules. Any capital asset held by a person for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset. While there are minor changes to this rule, for Gold, on need to identify whether it is a long-term or short-term gain.
Long term gains do go through indexation that will reduce your Taxable Income from the gain from the same.
Capital gain on Gold is calculated as
Capital gain = (full value of consideration received on transfer) – ( cost of acquisition of capital asset + cost of improvement of capital asset + expenditure incurred in connection with transfer of capital asset)
Long term gains do go through indexation that will reduce your Taxable Income from the gain from the same. Refer a comprehensive guide on capital gains tax
There are two Sections in Income Tax Law that can be used to avoid or defer tax on capital gains from the sale of Gold.
54F: Long-term capital gain arising on transfer of any capital asset other than residential house property. Where net sale consideration to be re-invested in purchase or construction of one residential house property in India
Using Section 54F, one can either avoid or delay in paying income tax on the proceeds from GOLD
In addition, you have an opportunity to park your gains from gold in a Capital Gains Deposit Account Scheme (aka CGAS Scheme) account from the select banks to defer paying taxes for up to 3 years. This requires attention from your Tax Consultant like EZTax.in to understand on how.
As Indian Society is moving due to Urbanization, Westernization, Jobs, and other Opportunities, traditional security or interest in holding Gold in its physical form such as Coin form, jewellery has lost its significance due to physical security etc.
There are alternatives in holding Gold as an asset in your portfolio to hedge and/or to treat as a traditional asset class.
Gold ETF: is an exchange-traded fund (ETF), is a commodity-based ETF where the principal asset is gold. It is like any other ETF act like individual stock, and trade on an exchange system in the same manner. The buy event do not give you any physical form of gold metal.
Tax Impact of GOLD ETF: Gold ETFs are subjected to Taxes like any other ETF. Gains will be treated as Short-Term Gain if liquidated within a year. Otherwise would be treated as Long term capital Gains.
Gold Fund of Funds: Another means of owning Gold in your Portfolio, gives you an opportunity to invest even in small amounts. Performance would depend on the basket of funds that were part of the Fund.
Tax Impact of Gold Fund of Funds: The Tax treatment would be like GOLD ETF.
E-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, which is not the case for GOLD ETF or Gold Fund of Funds.
Tax Impact of E-Gold: is like Physical form, one need to hold the units for 3 years to be treated as long term capital gain and the exemptions from Sections 54F can be availed to reduce the tax burden.
Sovereign Gold Bond Scheme issued by RBI: Reserve Bank of India (India’s Central Bank fully owned by India, which issue Indian Currency Rupee in India), issues Sovereign Gold Bonds periodically (sometimes every month) through various banks, post offices, and agencies at a minimum denomination of 1 gram of Gold for an average gold price during previous week, which is in general, slightly lower than the market price and at times gives you a Rs. 50 rate reduction to attract depositors.
Tax Impact of Sovereign Gold Bonds: is divided into three parts
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