The capital gains taxation rules on gold saw significant alterations from July 23, 2024. These changes affect all asset classes, including gold, mutual funds, and real estate, substantially impacting investors and sellers of gold jewellery. The adjustments were introduced to harmonise tax treatments across various investment categories, bringing clarity and uniformity to the taxation process for gold assets.
Under the revised rules, the tax on profits from the sale of gold jewellery hinges on the duration of ownership. Jewellery held for more than three years qualifies as a long-term capital gain (LTCG) and is taxed at a rate of 20% after indexation benefits. However, if the jewellery is sold within the three-year threshold, the gains are considered short-term capital gains (STCG) and are taxed according to the individual’s applicable income tax slabs. These changes aim to foster long-term investments in gold.
The regulations for inherited jewellery have also been addressed, clarifying the calculation of its cost of acquisition. Jewellery received from ancestors is considered a capital asset. If purchased before April 1, 2001, its acquisition cost is determined based on the fair market value from that date. The holding period is calculated from the original purchase date by the ancestor, with gains classified as LTCG if the period exceeds three years, ensuring a favourable tax treatment for long-held family assets.
The tax treatment of gold jewellery sales falls under ‘capital gains’. Inherited jewellery from parents or grandparents is considered a capital asset, with acquisition cost determined by the fair market value (FMV) as of 01 April 2001 for purchases prior to that date. The holding period is calculated from the grandfather’s purchase date, and if it exceeds 24 months, gains are classified as long-term capital gains (LTCG).
The taxable capital gain is computed as: Sale Price – Cost of Acquisition (FMV as of April 1, 2001) = Long-Term Capital Gain (LTCG). LTCG on gold sales is subject to a 12.5% tax, plus relevant surcharge and cess. If purchase bills are unavailable, valuation by a registered valuer can assist in determining the cost.
When purchasing gold jewellery, a Goods and Services Tax (GST) of 3% must be paid. This tax is applied to the total price of the gold jewellery, including any making charges. It is important to note that there is no income tax associated with the purchase of gold jewellery.
Capital Gains tax on gold MFs and ETFs
In addition to physical gold, these capital gains tax rules extend to gold mutual funds and gold Exchange-Traded Funds (ETFs). From April 1, 2025, these financial instruments will adhere to the updated regulations. Gains from investments held over 24 months will qualify as LTCG, attracting a 12.5% tax rate without indexation, whereas sales within this period incur STCG, taxed at the individual’s income tax rate. These adjustments align the tax treatment of gold ETFs with physical gold to maintain a cohesive investment strategy.
This adjustment is a result of the government’s modification to the definition of debt mutual funds, which will be implemented starting April 1, 2025. Presently, a specified debt mutual fund is described as a fund where less than 35% of its total proceeds are allocated to equity shares of domestic companies.
Under the updated definition, a mutual fund will be classified as a debt mutual fund if it invests over 65% of its total proceeds in debt and money market instruments, or if it is a fund-of-fund with a similar debt investment mix in its underlying holdings.
When selling a gold mutual fund before 24 months from the investment date, the gains will be classified as Short-Term Capital Gains (STCG) and taxed according to your income tax slabs. If the gold mutual fund is sold after 24 months, the gains will be considered Long-Term Capital Gains (LTCG) and taxed at a rate of 12.5% without indexation benefit.
For listed gold ETFs, selling before 12 months will result in STCG which will be taxed based on your income tax slabs. Selling after 12 months will result in LTCG taxed at a rate of 12.5% without indexation benefit.
Taxpayers should note that until March 31, 2025, the earlier tax rules were applicable. The new capital gains tax rules will apply to gold mutual funds and gold ETFs from April 1, 2025.