Income Tax on Digital, Physical and Paper Gold in India

Shreya Patel

30 Sep, 2023

The practice of investing in gold is fairly common. Depending on their financial objectives, people invest money in various types of gold. The earliest type of gold investing is physical gold. However, there are now a variety of methods for investing in gold. One of the most trustworthy and dependable types of investments is gold. You can invest in physical gold, digital gold, gold derivatives, or paper gold. It is no secret that Indians like gold. When taking into consideration the consumption of this dazzling metal, India came in first place among all other countries. Gold has stood for wealth and prosperity in our society for a very long time, and for good reason, which is it acts like a shield against risk and is an asset of great liquidity that can be instantly converted to cash.

What does Income Tax mean?

Income tax is a type of tax that the government levies on the income produced by the people and businesses under their jurisdiction. Government duties, public services, and citizen amenities are all paid for through income tax revenue. The central government is required to collect this tax under the Income Tax Act of 1961. Every year, the government can alter the tax rates and income slabs in the Union Budget.

Digital Gold

Meaning

Owning digital gold is the newest investing strategy that has gained enormous popularity among young people. The investor can invest in gold through mobile wallet¹ applications online, even when they do not physically possess any gold.

Income Tax on Digital Gold

Regarding taxation on gains, investing in digital gold is treated the same as owning physical gold. Short-term gains or within three years of purchasing digital gold are subject to income tax. The tax rate on long-term capital gains resulting from the investment in digital gold is 20%, plus a 4% cess and a surcharge. The idea of digital gold is similar to that of actual gold. The only distinction is that you can purchase them online and have the insurer hold them in lockers on your account. Additionally, government organizations like the RBI or SEBI lack the authority to control this form of investment.

Physical Gold

Meaning

The oldest and most popular approach to gold investing is still buying physical bars of the metal. It entails buying gold in tangible forms like bars, jewellery, or coins. The gold which can be touched with your hand is considered physical gold. In addition, physical gold can be retained as a tangible asset outside the confines of the conventional financial system.

Income Tax on Physical Gold

The Indian Income Tax Act states that long-term capital gains (LTCG) are subject to a 20% tax and a 4% cess when selling gold. The applicable tax rate for gold is, therefore, 20.8%. However, short-term capital gains are not taxed at this rate. When it comes to STCG, the proceeds from a gold sale are added to your yearly income and taxed at the appropriate slab rate in the income tax. When purchasing gold in the physical form, you would additionally be required to pay a Goods and Services Tax. Investing in actual gold is subject to a variety of taxes.

Paper Gold

Meaning

Financial vehicles that provide exposure to gold prices without owning real gold, such as gold futures, ETFs, and derivatives, are referred to as “paper gold.” These instruments offer liquidity but come with counterparty risks. Although you cannot physically acquire them, you can hold them on paper. This kind includes gold mutual funds, exchange-traded funds (ETFs), sovereign bonds, etc.

Income Tax on Paper Gold

Gold ETF and mutual fund returns are taxed similarly to gold in physical form. SGB returns, on the other hand, are taxed differently. If you purchase gold using mutual funds or ETFs, your long-term capital gains tax will be 20.8%. Investors who retain their investments for less than 36 months are considered short-term investors and won’t be directly taxed on their profits. The applied tax rate for the gold which was held for less than three months will be as per the income slabs in the income tax.

Rules of Income Tax for Non-residents of India

Non-resident Indians can invest in physical gold, paper gold, digital gold, etc., per the Income Tax Act. NRIs are not permitted to invest in sovereign gold bonds, though. In the case of an NRI, the taxation regulations for the sale of gold investments are the same as those that apply to residents. NRIs must, however, pay TDS when redeeming gold mutual funds or exchange-traded funds (ETFs): 20% TDS for long-term redemptions and 30% TDS for short-term redemptions.

What are the Income Tax Rules when the Gold is Gifted or Inherited?

You can receive an income tax exemption on gold purchases if you receive gold as an inheritance from family or friends or as a gift. Parents, spouses, or children who give gold ornaments or jewels as gifts are not subject to income tax, according to Section 56(2) of the Income Tax Act. On the other hand, you must pay taxes if you receive it from anyone other than family members, and it surpasses Rs 50,000. As it is deemed income from other sources, this income is taxable. Additionally, you are eligible for a tax exemption on the gold jewellery you got as a wedding gift. However, if you plan to sell such gifts, the government will charge you tax based on the capital gains tax rate.

Conclusion

Taxes are an essential component of buying or selling a capital asset, and as gold is a customary capital asset for Indians, the circumstance is equivalent. When making a purchase or a sale, we should be aware of any applicable taxes and pay them promptly. It’s crucial to keep in mind that investing in gold and using it for ornamental purposes are two very different things. Indians have long been fond of investing in gold, although doing so carries some risk. Numerous economic factors, like investments in bonds and stocks, influence the price of gold, which is always fluctuating.

Frequently Asked Questions

1. http://cashlessindia.gov.in/mobile_wallets.html