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How are Digital Gold Investments Taxed?

Team Jar
January 4, 2023
How are Digital Gold Investments Taxed?

Digital gold investments have become popular among youth. But, what we need to pay a little more attention to is the taxes that get applied on the returns. Here's how Digital Gold Investment is taxed.

Regarding investments, we Indians have a special place in our hearts for gold. Traditionally, people used to buy physical gold only. But today, the scenario has changed completely.

Now we get to see a lot of options available in front of us when it comes to investing in gold like digital gold, physical gold, derivative contracts, paper gold, etc. The most popular of these is Digital Gold.

The reason is the involatile nature of the investment and consistent returns. But not many of us know that the returns on digital gold investments also get taxed after a certain period.

In this article, let us discover how digital gold investments get taxed.

Types of Gold Investments

Before we jump into the complexities of taxing, let us first understand the different types of gold investments and their meanings.

Physical Gold

This is the most common type of gold investment, which can be seen regularly in Indian households. Buying physical gold jewelry and collectables is a go-to hobby for both men and women here. In this type of gold investment, we are responsible for the physical security of the gold we own.

Paper Gold

This type of gold investment is only done on paper, we don't have to own gold in physical form, but the proof of our owning it is on paper. Sovereign Gold Bonds (SGBs) and Exchange Traded funds (ETFs) are good examples of paper gold investments.

Derivative Contracts

This type of gold investment is only available to businesses. Here, in a derivative contract, gold is kept as the underlying asset. The taxation for this is also very different from the other types of gold investments.

Digital Gold

Digital gold investments have become popular in the last few years, especially among youth. There are tons of wallet mobile applications available that allow us to invest in digital gold, where we can even start investing in gold with just Re.1!

Taxation on Different Types of Gold Investments

India is one of the largest gold importers in the world, where most of the gold is used for jewellery purposes. When we sell gold in India, the taxes depend on the time we kept it.

Capital gains from the gold which is sold within three years of its buying or a short term are taxed directly with our income tax. And the capital gains from the gold which is sold after three years of buying or a long-term are taxed based on the nature of the investment. Different types of gold investments are taxed differently.

Let's examine how different forms of gold investments are taxed, including digital gold investments.

How is Physical Gold Investment Taxed?

If we sell our gold jewellery within 3 years of buying it, we don't need to worry about any additional taxes as it gets calculated with our income tax itself.

But after three years, the return on our gold investment is considered a long-term capital gain, and we need to pay 20% of our capital gains as a tax, with the addition of any surcharge, and 4% cess, with indexation benefits. Moreover, we also need to pay the additional GST while buying physical gold.

This means the purchase price of gold is adjusted after factoring in inflation. So, a plethora of taxes is applicable when it comes to physical gold investments.

How is Paper Gold Investment Taxed?

To passively track the price of gold, gold ETFs invest in physical gold. Gold ETFs are therefore purchased by gold mutual funds. In other words, a rising gold price increases the worth of a gold ETF or fund, and vice versa.

The taxes on mutual fund returns and gold ETFs are similar to that on physical gold, i.e. 20% plus 4% cess for long-term capital gains. SGB returns, on the other hand, are taxed differently. After 8 years of holding an SGB, our returns get tax-free.

In case we sell it before 8 years, the interest is usually under the range of 2.5% per annum, which is considered income from other sources and taxed accordingly.

A five-year lock-in period is standard for SGB offerings. All returns from such transactions are treated as long-term capital gains if we decide to sell the assets after this period, but before they reach maturity we have to pay a tax of 20% with a 4% cess and an additional surcharge.

How are Returns from Gold Derivatives Taxed?

The taxes on our gold derivative returns are applicable according to the size and total profit of our business. For instance, 6% of the returns are taxed if the annual total turnover of a business is less than Rs 2 crore.

Returns from gold derivatives can be claimed as business income, which can reduce the tax liability associated with such transactions.

According to some experts, if we wish to enjoy the benefits of Section 44AD of the Income Tax Act, we would need to maintain a precise record of our business's books and accounts.

How is Digital Gold Investment Taxed?

Investments in digital gold are treated the same way as investments in physical gold when it comes to taxation and gains. Digital gold investment is popular among youngsters due to its affordability and convenience.

Thus, we need to understand how it is taxed as well. Short-term gains or gains within 3 years of buying digital gold are taxed with income tax itself. Long-term capital gains from our digital gold investment are taxed at 20% with a cess of 4% and a surcharge.

If you wish to automate your daily savings and invest in digital gold, our daily savings app is perfect for you. You can easily automate your daily saving and start investing in digital gold with just Re.1! Download now!