Buying valuables such as gold and silver on events like Dhanteras is auspicious in India. This year buyers have another option: sovereign gold bonds, which are currently open for subscription. Many jewelers have also rolled out promotional offers to attract buyers. Stock exchanges NSE and BSE will increase the trading session for gold ETFs and sovereign gold bonds till 7 pm today on the occasion of Dhanteras. After the regular market hours of 9:15 am to 3:30 pm, trading in gold ETFs and SGBs will resume at 5 pm and continue till 7 pm, the exchanges said.
“You can have gold in your portfolio as insurance, but how much? 5-10% is the maximum. I think more than this percentage would be the wrong choice. If you are investing in gold for other reasons like your daughter’s marriage, then it’s completely fine; otherwise, too much investment in gold is a wrong choice,” says Ramalingam K, founder, and CEO at Holistic Investment Planners.
Also, investors should be aware of the income tax suggestions of different forms of gold in case they sell it in the future.
Capital gains tax on gold is dependent on the form it was purchased. Also, it depends on the time period the asset is held. If gold is being sold within three years from the date of purchase, then it is considered short-term. Otherwise, it is considered in the long term.
Long-term and short-term capital gains tax
Short-term capital gains on the sale of gold is added to your total gross income and taxed accordingly. Long-term gains on the sale of gold are taxed at 20.8% (including cess) with the benefit of indexation. The buying price of gold is adjusted after factoring in inflation.
Tax on sale of physical gold
Gains from the sale of solid gold such as bars, coins, or jewelry within three years from the date of purchase are considered as short-term capital gains and taxed accordingly. After three years, gains are regarded as long-term capital gains (LTCG).
Income tax on gains from gold ETFs, gold mutual funds
Gold ETFs are securities that track the metal’s prices, and they are traded on stock exchanges. Gold mutual funds or MFs, in turn, invest in gold ETFs. Gains from the sale of gold ETFs or gold MFs are taxed similarly to that of physical gold.
Sovereign gold bonds
These are government securities denominated in grams of gold. RBI issues them on behalf of the Government of India from time to time. Sovereign gold bonds come with a maturity period of 8 years, with an exit option from the fifth year.
Moreover, if you hold the investment till maturity, any capital gains are exempt from tax. This benefit is not available in other instruments like gold ETF or gold funds.
Gold bonds pay interest at the rate of 2.50% per annum on the amount of initial investment. The interest on gold bonds is taxable, but TDS is not applicable.
Although the gold bonds mature after eight years, the exit options starts after the fifth year. You can also trade gold bonds on stock exchanges within a fortnight of issuance, and exit. In case you exit before maturity, you will get indexation benefit while calculating long-term capital gains.
“Gold bonds offer a superior alternative to holding gold in physical form because it frees the investor from bearing the risks and costs of storage. Investors are assured of the market value of gold at the time of maturity and periodical interest. Gold bonds are free from purity issues and making charges which are incurred when gold is held in jewelry,” says Ramalingam K.
Also, that bonds carry sovereign guarantee both on capital invested and the interest, he said.
GST is not levied on sovereign gold bonds, making this scheme further cost-effective. Otherwise, GST at 3% is levied on gold purchases.