How GOLD help you afloat in a Turbulent Economy & its Tax Impact

This document covers

1. Why Gold as hedge against troubled Economy ?
2. What is the Tax on Gold ?
3. How the Capital Gain on Gold is calculated ?
4. How to avoid or defer paying Tax on Gold ?
5. Alternatives to buying Gold as Coin or jewellery ?

1. Why Gold as hedge against troubled Economy ?

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.

2. What is the Tax on Gold ?

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.

3. How the Capital Gain on Gold is calculated ?

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

4. How to avoid or defer paying Tax on Gold ?

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.

5. Alternatives to buying Gold as Coin or jewellery ?

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.