Trading In Paper Gold

With gold prices surging, trading in gold ETFs is gaining greater investors' interest. ETIG explains the tax implications of trading in this form

DEVANGI JOSH I ET INTELLIGENCE GROU P

    Indians are fond of the yellow metal and it's not surprising that the country is the biggest buyer of gold in the world. While physical gold has historically been a store of value and universal currency of exchange, in recent years, instruments like gold futures and gold exchange-traded funds (ETFs) have opened new avenues for investors. Tax authorities, however, treat the new-age gold instruments, or derivatives, differently than the physical metal. Understanding the tax implications is important to maximise your post-tax return on your investment in gold.
    Gold ETFs are open-ended mutual funds that buy standard gold (99.5% purity) and place it with custodian banks for safekeeping. Against this physical metal, units in demat form are issued to investors, which are equivalent in value to about one gram of gold. These units are traded on the stock exchange like shares. The ETFs are taxed as per non-equity MF taxation rules. Being non-equity funds, trading in them doesn't attract any securities transaction tax (STT). The ETF holder just has to pay an annual expense of the scheme, which is out of any tax ambit.
    In contrast, trading in gold futures attracts a combined service tax and education cess at 12.4%, on the standard brokerage fee. Trading in gold futures takes place with the delivery or without delivery. When the delivery takes place, gains or profits is treated as a business income and taxed according to appropriate tax brackets. And, if the contract is settled without the delivery, proceeds are treated as an income from speculation and are taxed under short-term capital gains.
    Unlike holding the physical gold, ETFs don't attract any wealth tax, which is charged at 1% of the amount by which the net wealth of an individual exceeds Rs 15 lakh. Physical gold held in the form of jewellery, bullions or utensils is considered as one of the assets, which add to a person's wealth. But when the yellow metal is held as ETF units, which is a paper, or demat holding, the person is outside the realm of wealth tax.
    The gold ETFs also score over the investment in physical gold considering the capital gains tax provision. The physical gold is considered as a longterm investment, if it is possessed for more than three years, however, the ETFs gain this status in a time period of one year. Thus the physical gold will draw a short-term capital gain tax at 33.9%, if sold within three years of possession, while the gold ETFs attract the tax, if the units are sold in one year.Selling the gold ETFs after possessing for one year will attract long-term capital gain (LTCG) tax, which could be a minimum of either 10% of the LTCG or 20% of the LTCG computed with an indexation benefit.
    The second option takes into account the effect of inflation on the cost of buying, which is done by using the cost inflation index (CCI). Hence the capital gain is not just the difference between selling price and buying price, but the difference adjusted with an effect of CCI. None of the gold ETF schemes in India have declared a dividend, so far. However, in case they do declare, the same will attract a dividend distribution tax (DDT) at 14.16% in the hand of the investor. This is because the gold ETFs are non-equity schemes and, hence, get a treatment equivalent to a debt MF.
    devangi.joshi@timesgroup.com