Taxation on physical gold vs gold ETF explained

When deciding whether to invest in physical gold or gold ETFs, it's crucial to consider the potential tax implications. Chintan Ghelani, a tax expert, explains that the tax treatment depends on the holding period of the asset.

For physical gold, if you hold it for 24 months or less, the gain on sale is considered Short Term Capital Gain (STCG) and taxed at your individual income-tax slab rate. However, if you hold it for more than 24 months, it becomes Long Term Capital Gain (LTCG), taxable at 12.5% plus applicable surcharge and cess, without indexation benefit.

Gold ETFs, on the other hand, offer a different tax structure. If you hold gold ETF units for 12 months or less, the gain is treated as STCG and taxed at your applicable income-tax slab rate. For investments held beyond 12 months, they are considered Long Term Capital Gains (LTCG), taxed at 12.5% plus applicable surcharge and cess, similar to physical gold.

One advantage of gold ETFs over physical gold is that the Rs 1.25 lakh annual LTCG exemption, available for equity shares and equity-oriented mutual funds, does not apply to gold ETFs. This means that any gains exceeding this limit are subject to the 12.5% LTCG tax, which is identical to the rate for physical gold after 24 months of holding.

When purchasing physical gold from a jeweller, you may need to pay Goods and Service Tax (GST) of 3% on the total transaction value, including making charges. However, if you sell personal old gold or jewellery to a jeweller, the transaction is generally outside the GST purview, as long as you are not selling in the course or furtherance of business.

It's crucial to keep purchase invoices and other documentation, especially in cases of inherited or gifted jewellery, to establish the source of the gold and compute capital gains upon eventual sale.