Gold(en) Tax

Governments lie; bankers lie; even auditors sometimes lie. Gold tells the truth. Borrowers will default. Markets will collapse. Gold prices (the ultimate form of safe money) will skyrocket. I suppose this is why people buy Gold.

Of late, many of you would have noticed that Financial Advisors have developed a lot of affection and drawn attention to investment in Gold. You don’t believe me? Login to your email account – search the word ‘gold’ and you will be surprised to see loads of emails from HDFC, ICICI, IDFC, or some other random banks, pleading with you to invest in GOLD. There is a new type of investment in gold – Sovereign Bonds. A few years back, the same folks asked us to invest in Gold ETFs, Gold Coins / Bars – remember those days?

If Gold is such a fascinating item, will not our tax sleuths have them on their radar? Yes, Gold is an interesting topic for taxmen as well.

Buying Gold

Usually, gold is sold through small shops, which are mostly owner driven. If not all, some of us would have countered a situation like this – after 2 hours of searching for the right product, the shop owner would have asked– ‘do you need the bill?’. Having blown up the entire money in the wallet, (invariably, we end up spending more than our budget, agree?), his question will be like music to our ears and we instantly settle for ‘estimate/a piece of paper mentioning the ‘grams’ and ‘the amount’, instead of Bill, so that GST (VAT in the past) can be saved on it.

In fact, it is a mind game! We pay GST at 28% on TV (with Bill) but resist paying 3% GST on Gold! We think, too much tax on Gold. (Today, Gold is sold through large corporatized shops, leaving little chance to go without Invoices). Lesson. Obtain Bill.

A Myth – Limit on Gold Holdings

There is a myth that the tax department will confiscate gold and ornaments in case of search/seizure and thus, one person/family shouldn’t hold Gold more than the prescribed limits.

The answer –

  • When you buy gold – obtain a bill (don’t try to save GST)
  • There is no limit to holding gold (you can accumulate as much you can, to your children, grandchildren, great-grandchildren – learn from our politicians)
  • Buy Gold from tax paid money! (means we should explain the source of funds. Suppose, Mr. Chinna gets Rs.70 Lakhs per year as salary from Microsoft and buys Rs.40 lakhs worth gold per year, no questions will be asked by the taxmen)

I know some of you are not satisfied with my answers. You remember having read somewhere about the limit on holding/hoarding Gold for male/female, etc. Am I right? For those who have to this doubt, further clarifications –

Type of person

Limit of Gold in Grams

Married Lady500
Unmarried Lady250
Male member (married/not)100

 

This limit is fixed by the Income Tax department through an internal circular to the Tax Officers stating that –

  • When they conduct a search (raid) of the premises of the person, if they find Gold and ornaments which are not backed up by the explainable source of funds;
  • Not to seize the Gold/ornaments up to the above specified limits

Thus, the limit is not for holding the gold, it is a minimum limit that can be held by the family, even if there is no Invoice or explainable source of funds for sourcing the items.

My mom / mom-in-law gave me. Can I ask her to give the Invoice along with the Gift? Don’t joke with me!

I am not joking. It is a fact. If you are getting Gold through inheritance, a Will, or as a Gift, ask them politely (after taking the Gold, if you have the fear that even gold may not come if you ask for the bill!!), for the Receipt/Invoice.  (Note: Receipt of Gold through above means is not taxable, but when you sell them, it is taxable)

Gold valuation If no bills are available, consider it as inherited or bought prior to 2001 and adopt the Fair Market Value (FMV) as of 1st April 2001. (where can we find it? You can, the data is available)

My children are settled in the USA. They don’t want any of these Ornaments. I want to sell them. Will it attract any taxes? (Recently, I got 2 queries like this! I think the NEXTGEN is not possessive of Gold ornaments. They may be feeling 1-gram gold looks better, more shining than real Gold). Yes, selling Gold including Ornaments/Jewellery attracts taxes.

My friend gifted gold worth Rs.5 Lakhs, is it taxable?

Remember three points –

  1. Gift from relatives is exempt
  2. Gift from non-relatives, total value up to Rs.50,000 per year is exempt.
  3. Gift from anyone (relative or not) during the marriage is exempt

This means Rs.5 lakhs worth Gold, received from a friend is taxable. Suppose, the friend gave Gold on the occasion of your marriage, it is exempt from tax. (How to prove that it is given on the occasion of the wedding? Should your friend enclose the bill along with the ornament? If not, how will the department prove otherwise, if you lie that the Gold is received on the wedding day? Can they cross examine? meaningless isn’t it). Maybe the general understanding is that there can’t be a friend on earth, who can handout such an expensive present.

Gold ETFs

Gold Funds are traded in Stock Exchanges. The Capital Gain from the sale of ETFs is taxable.

Sovereign Gold Bonds

Some pointers

  • Gain from Bonds at maturity (after 8 years) is exempt from tax
  • Interest (the Scheme pays abysmal interest till holding) is fully taxable
  • Capital Gain on sale of bonds in Stock Exchange or early redemption before the maturity is taxable

Oops! How many variations of Gold? Gold bar, Gold Biscuits, Gold Ornaments & Jewellery, Less-Paper Gold (ETFs, Bonds), Paper-Less Gold (Digital), intangible gold, intangible gold!! How to remember the taxation of all these variants?

Golden Rule – Tax on Sale of Gold

Simple. Except for a sale of Sovereign Bond at maturity, the sale of all other variations of Gold attracts Capital Gain Tax.  Holding the Gold for over 36 months? Say Long Term Capital Gain Tax. Short-term capital gain tax if it is held for less than 36 months.

The longer you hold, the lower the taxes (20% with indexation); the shorter you hold, the higher the taxes (30% or slab rates, no indexation benefit, please). Plus, surcharge, Cess, as applicable.

The golden rule is to keep the documents related to the purchase of gold (as safely as the gold!) and lessen the worries while holding or selling them!

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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Guru
Guru
10 months ago

Good one…really simplified… 🙂

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