Here, we will discuss income tax on gold investments
You need to know about tax impact on gold investments not only because you need to file for income tax
Among investments we will discuss are gold exchange traded funds or Gold ETFs, gold mutual funds
Here, the gold mutual funds end up investing in gold mining and gold trading companies
We are also talking about physical gold like bars and coins
Also, digital gold where you don't hold the gold physically at all
Reason why tax impact is important is that on exit from the gold investments for any need, there is tax impact
In case of gold, it is capital gains tax
Depending on the length of time for which you are invested, you get taxed accordingly
If you pay more tax, your returns after tax is less and you save less
That makes the difference between the investment being rewarding and not so rewarding
You decision on liquidating the gold investment is also very important
For gold investments of less than three years, the gains are considered as short term capital gains
As a result, you need to pay short term capital gains tax
In this case, the capital gains get added to your income and get taxed according to the relevant income tax rate
If in highest tax brackets, for gold investments of less than 3 years, you are getting taxed hard
Capital gains from gold investments of more than three years are considered as long term capital gains
For tax purposes, the capital gains gets brought down by the same proportion as inflation
So, you have an inflation indexation benefit
For tax purposes, the capital gains get lowered and you pay a long term capital gains tax of 20%
As a result, the tax impact is much lower in case of long term capital gains from gold
Basically, income tax laws are encouraging investors to stay invested for the long term
This is a good thing to happen as you shouldn't invest more than 10% of your overall investments in gold
You will make reasonable amount of gains only if you stay invested for the long term
This is how your physical gold, gold exchange traded funds, gold mutual funds get taxed
Sovereign Gold Bonds (SGB) has a twist in the tale
For 8 years you remain invested in Sovereign Gold Bond (SGB) or till the end of its tenure
Then, there is no capital gains tax. This is the reason why Sovereign Gold Bonds are so attractive
Of course, you can transfer the ownership of the bonds somewhere between Year 5 and Year 8
In that case, you get the benefits of inflation indexation and long term capital gains
You also get an annual coupon payment which is taxable
Capital gains from gold investments need to be filed under the head of Income from Capital Gains during income tax filing
The income from the coupon payments needs to be filed under the income head of Other Income