Gold is among the most popular metals both for ornamental use and investment given the trust Indians have exhibited in it for centuries. The country imported gold worth $46.14 billion in the financial year 2021-22, up 33.34% compared to last year. This solid consumption begs the question— “How much am I paying in taxes when buying or selling gold?”.
Here’s a comprehensive guide on how gold is taxed in India.
Tax on Physical Gold
1) Import Duty
A huge portion of India’s gold demand is fulfilled by imports as India doesn’t have as many gold mines to match the huge demand for the commodity. As most of the gold is imported, it attracts Import duty.
Quite recently, the Government of India increased the import duty on gold from 7.5% to 12.5%. Considering this latest figure, let’s take an example: If we are importing INR 1 lakh of gold, at this stage we will have to pay 12.5% as import duty. Hence now the cost of the same gold is INR 1,12,500.
2) Agriculture Infrastructure Development Cess (AIDC)
The AIDC is collected by the Government of India to spend on the development of the nation. 2.5% AIDC is applicable on gold imports. Once the cess is added along with the import duty, the cost of gold would cost INR 1,15,000 if the above example of INR 1 lakh worth of gold is to be considered.
3) Goods and Service Tax (GST)
The GST is applicable on the sale of gold by jewelers or merchants and this cost is passed on to the end consumer. 3% GST is charged on physical gold purchases. Upon import of INR 1 lakh of gold, 3% GST will be charged on INR 1,15,000, which is its value after adding the import duty and cess; that’ll add another INR 3,450 and now the cost to the customer will be INR 1,18,450.
4) Making Charges and GST On It
Making charges do not constitute as tax but a charge is applicable for designing the gold to either coins or jewelry, and hence the making charges attract additional GST. Although the GST cost on this charge might not be presented separately but is included in the making charges column in the final bill when you make a gold purchase.
The GST on making charges is 5% and the making charges vary from 8% to 35% on gold jewelry. Let’s consider a minimum amount of 8% as making charges for the above example of importing INR 1 lakh gold. Upon applying charges of 8%, which is INR 9,200 on INR 1,15,000
and GST on making charges of 5% of INR 460, the total cost you will pay will be INR 1,28,110.
5) Tax Deducted at Source (TDS)
If one buys physical gold of more than INR 1 lakh then they will be charged TDS at 1%. This amount can be utilized in the annual tax liability.
Taxes On Selling Physical Gold
1) Short-term Capital Gains Tax (STCG)
Short-term capital gain is applicable if the gold is sold within three years of purchase. This gain is added to the income of the person and taxed according to the tax slab the person falls in. Thus, if the income falls under the 30% slab, the gain amount i.e., sale price minus the purchase cost will be taxed at 30%.
2) Long-term Capital Gains Tax (LTCG)
Long-term capital gains tax is applicable when the gold is sold after three years of purchase. LTCG on gold gains is 20% with indexation benefit (Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it). This can be waived off if the entire net proceeds from the sale are used to buy government tax benefit bonds like the National Highway Authority of India bonds, REC bonds, among others.
Another way to save taxes is if the net proceeds are used to buy a house either within one year before the sale of gold or within two years of the sale or if the net proceeds are used to build a house within three years of sale of the underlying gold.
3) GST on Exchange of Jewelry
This is a tricky scenario and one must be conscious while transacting in an exchange as the person can be deceived while transacting. When we go to exchange gold jewellery, the transaction doesn’t attract GST if you exchange the same quantity of gold. For example, if one goes to a jeweler with 100 gms of jewelry and exchanges it for a 100 gms of jewelry, no GST is applicable on the gold.
The person would only have to pay for the making charges difference and the applicable taxes on it. Thus, we should be careful of the taxes applied to the bill and ensure that the exchange amount is not taxed.
Tax on Digital Gold
Taxes on digital gold offerings include the following:
Sovereign Gold Bonds (SGBs)
These are bonds issued by the RBI on behalf of the Government of India. One bond represents 1 gram of gold. These are backed by the Government hence are considered very safe.
Taxation on SGBs:
STCG: If one sells their SGBs within three years of buying, STCG will be applicable. The gains will be added to the income of the person and taxed according to the applicable tax slab. LTCG: This is applicable if the bonds are sold at a gain after three years of purchase at 20% with indexation benefits and 10% if indexation benefit is not availed.
No LTCG is applicable if the bond is held till maturity, that means LTCG is exempt. The maturity period for an SGB is eight years.
As these bonds are traded on exchanges one can buy a bond of his choice. Hence, if one wants to invest in gold for a period of three to eight years and doesn’t want to pay tax, SGB is the preferred option.
LTCG is applicable on individuals and not HUFs and Trusts.
GST: This is not applicable on SGBs as they are treated as securities. Making charges and GST on it: As SGBs are digital assets, no making charges are applicable on it and hence no GST on making.
GST is applicable only on the STT and brokerage amount. On a comparative note, these charges are at max, 0.75% of the value of purchases. Hence GST liability is very minimal on SGBs.
TDS: This is not applicable on SGBs.Tax on Interest Amount: Income tax is applicable on the interest earned on SGBs. SGBs offer a 2.5% per annum interest. This interest is added to the income and taxed according to the applicable tax slab. Although this is an additional tax but on a comparative note, SGBs give interest which is not the case in physical gold. Hence, this tax should not be considered as a burden.
Gold Exchange Traded Funds (Gold ETFs)
These are mutual funds, which are traded on stock exchanges in units. Gold ETFs prices represent the value of the underlying gold. These are issued by various mutual fund houses.
Taxation on Gold ETFs:
STCG and LTCG: STCG is applicable on Gold ETFs similar to that of SGBs, according to the individual’s tax slab. LTCG on Gold ETF is also similar, 20% with indexation benefit and 10% if indexation benefit isn’t available.GST: GST is applicable only on the STT and brokerage. GST is also applicable on the expense ratio of the fund. The maximum expense ratio for Gold ETFs in India is 1%. 18% GST is charged on this expense ratio.TDS: This is not applicable on Gold ETFs.
Gold ETFs are a preferred option for individuals who want to invest in gold with tax benefits, but have small amounts. Gold ETFs can be bought for a minimum of INR 50 whereas SGBs one has to buy a minimum of one unit, which is equivalent to one gram of gold.
Bottom Line
Taxation is an integral part of purchasing or selling a capital asset and as gold is a traditional capital asset for Indians, the scenario is no different. We should be cautious of the taxes applicable on the purchase or sale and should pay them when due.
An important part to note here would be that gold investment and ornamental use are two different utilities. In case the primary motive is investment, purchasing the yellow metal on stock exchanges in the form of SGBs or gold ETFs can be a preferred choice since the tax cost is minimalized along with costs such as making charges being completely discarded.