How are Digital Gold Investments 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.

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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.

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

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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.

Here are a list of few different types of gold investments.

• Physical Gold
• Paper Gold
• Derivative Contracts
• Digital Gold

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Taxation on Different Types of Gold Investments

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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.

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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.

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

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Physical Gold Taxation: Everything you Need to Know

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The physical form of gold includes jewellery, gold biscuits, gold ornaments, gold coins, etc. For ages, the physical form of gold has been a popular investment option in India. Now let's understand the physical gold taxation.

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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.

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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.

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Tax on Paper Gold Investment in India

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This type of gold investment is only done on paper and 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.

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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.

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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.

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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.

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Tax Treatment of Gold Derivatives in India

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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.

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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.

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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.

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Taxation on Digital Gold Investments

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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.

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Thus, we need to understand how the tax on digital gold works. 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.

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Income Tax on Inherited or Gifted Gold in India

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On important occasions, Indians inherit gold and give it to their loved ones. Nonetheless, you may be excused from paying income taxes on gold purchases if you receive it as a gift or inheritance from family members or other relatives.

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Parents, spouses, or children who give golden ornaments or jewelry are exempt from income tax under Section 56(2) of the Income Tax Act. On the other side, you must pay taxes if you receive more than Rs 50,000 from someone other than your family. Since it is classified as income from other sources, this type of income is taxable.

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Additionally, gold jewelry received at your wedding is exempt from taxes. The government will, however, charge you the capital gains tax rate if you plan to sell these presents.

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Tax Implications on NRI Gold Investment in India

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As per the Income Tax Act, Non-resident Indians can invest in paper, digital, and physical gold.

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However, according to RBI and FEMA regulations, NRIs are not permitted to invest in Sovereign Gold Bonds. NRIs must pay TDS on gold ETF or mutual fund redemptions even though their applicable tax rate on gold sales is the same as that of Indian citizens.

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Short-term returns from gold exchange-traded funds (ETFs) held for less than 36 months would be subject to slab rates, while long-term gains would be subject to a flat 20% tax. This regulation is in effect until March 31, 2023, nevertheless. This was changed by the Finance Act 2023 to treat all gold ETF profits as short-term in nature, effective April 1, 2023.

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Frequently Asked Questions

Is there any tax on Digital Gold?

Yes, digital gold is taxed like physical gold. Short-term gains (within 3 years) are taxed as per income tax slabs, while long-term gains are taxed at 20% with a 4% cess and surcharge

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How do I report income from gold investments on my tax return?

Income from gold investments is typically reported on your tax return under capital gains. You may need to fill out specific forms or schedules depending on the type of investment (physical, digital, or paper gold).