Query 1]
I have following enquiry. Please advise me for tax purpose:
- What is the difference in taxability when gold purchased in ETF and gold
purchased in the physical form in the market? - The period of long term in ETF & gold in physical form and what is the tax liability in of long term in ETF and gold purchase in physical form? [R.S. Bagadia, Alsi Plot, Akola- rajkumarbagdia@gmail.com]
Opinion:
“For more than two thousand years gold’s natural qualities made it man’s universal medium of exchange. In contrast to political money, gold is honest money that survived the ages and will live on long after the political fiats of today have gone the way of all paper.” – Hans F. Sennholz
The Sheen of the Gold never fades. For centuries, yellow metal has been used as money and has been a relative standard for currency equivalents. Not for its shine or usage alone, Indians buys Gold for the sake of investments & returns as well. Whether it’s for investments, gifts, as tribute to deities, weddings or any festive occasion, gold is an important part of the equation. Gold is considered to be a symbol of prosperity, good fortune and one of the safest inflation beating investment option. Report suggests that Indians hold more gold than any other population of the world.
Mostly people hold gold in physical forms as the preferred mode of investment. Time has changed and now an alternative in the form of Gold Exchange Traded Fund (ETF) for investing in Gold has emerged.
ETFs, though regarded as Mutual Funds, are different from the later. The most important benefit of an Exchange Traded Fund is its tax efficiency owing to its origin.
Gold ETFs are superior from the tax perspective as compared to physical holding of Gold in the form of bars, coins or Jewellery. It equally scores well on convenience of storage and disposal, even though such convenience may entail a small cost in terms of a charge. It could be considered as a safe and return oriented investment as it is theft free & have easy liquidity.
Gold, physical or ETF, is a capital assets (ignoring businessmen engaged in the business of jeweler & Bullion) under the Income Tax Laws & sale transaction would yield capital gain or loss.
Though investment in God ETF has its own merits in terms of convenience of acquiring and resale, it also carries beneficial tax treatment. Tax advantages associated with buying gold Exchange Traded Funds (ETF) over the physical buying of gold are as under:
Holding Period to Qualify as a Long Term Capital Assets:
Gold ETF, being Mutual Fund units, the minimum holding period for such assets to qualify as long-term capital assets is one year. For physical Gold, three years period would be required to be reckoned as long term capital assets. In short, physical gold has to be held for three years to be termed as long-term capital assets, while gold ETF would get the same status in just one year.
Taxability & Tax Rate:
As Gold ETF are not equity oriented mutual funds, long-term capital gains (LTCG) on the sale of gold ETF’s is not fully exempt from tax. For the same reason, Short-term capital gains (STCG) would be taxed at a normal rate & would not be eligible for special rate of taxation of 15% applicable to sale of shares through recognized stock exchange.
However, these are eligible for the concessional LTCG tax rate at a minimum of 10% of the gains without indexation or 20% of the gains with indexation. Effectively, if you sell your gold ETF after 12 months, you would need to pay just 10% of gains as tax; while in case of gold sale after a year, the tax rate could be higher.
Exemption against LTCG:
LTCG arising on sale of any long term capital assets other than residential house property is eligible for an exemption under section 54F, 54EC or 54EE. Gold ETF becomes a long term capital asset in just one year as against physical gold which needs at least three years to avail such exemptions.
Convenience of selling:
Selling or disposing off the Gold ETF could be done in installment or as per the convenience of timing and is more transparent and cost effective as compared to selling the physical gold.
Accounting convenience:
Recording the transaction of purchase / Sale is easy & convenient in case of Gold ETF. The strong documentary support is available in case of investment through this mode as against the purchase of gold in physical forms where even the genuine purchase bills are questioned and cross examined.
True, there are only two things that are certain in life- the Death & Taxes. But the incidence of taxes could be minimized to a great extent by planning the investment through right vehicle.
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