Gold stands as a preeminent symbol within Indian culture, held in high esteem for its exquisite allure, unadulterated purity, and enduring value. With a history spanning centuries, gold has become an indispensable element of Indian heritage. Unquestionably, gold occupies a unique and cherished spot in the hearts of the Indian populace, elucidating the widespread practice of purchasing and investing in gold and silver during festive occasions.

Prior to making any decision, it's crucial to have a clear understanding of the tax ramifications tied to investments in gold and silver. Below are some essential tax factors to bear in consideration:

Capital gains tax: Investments in gold and silver are subject to capital gains tax (CGT) in India. CGT pertains to the tax levied on the profits obtained when selling a capital asset, like gold or silver. To determine the nature of the gain, the holding period is set at three years. If you sell your gold or silver within three years of purchase, any resulting profit falls under the category of short-term capital gains (STCG). The STCG is taxed according to your applicable income tax slab rate. On the other hand, if you sell your gold or silver after a holding period exceeding three years, any profit generated is classified as long-term capital gains (LTCG). The LTCG on gold and silver is subject to a fixed rate of 20 per cent, with the added advantage of indexation.

Indexation advantage: Indexation benefit serves as a method for diminishing your capital gains tax obligation by compensating for the impact of inflation on your investment's cost. Essentially, this approach ensures that you are taxed solely on the actual profit earned, taking into account the erosive effects of inflation. To take advantage of the indexation benefit, you must keep tabs on the Cost Inflation Index (CII) for the year in which you acquired your gold or silver investment. The CII is annually published by the Central Government.

How many ways can you invest in gold?

Investing in gold or gifting gold investments to your loved ones is a great way to celebrate festivals. With so many ways to invest in gold including bullions, sovereign gold bonds, gold exchange-traded funds (ETFs) and mutual funds, Indians will always find a way of investing or gifting each other during festivals. However, there are tax implications of buying and having them, which you must be aware of.

Sovereign Gold Bonds (SGBs): Sovereign Gold Bonds (SGBs) represent a digital alternative to traditional investments in physical gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are available in various denominations based on grams of gold. SGBs are actively traded on the stock exchange.

To participate in SGBs, investors are required to make a cash payment to an authorized broker regulated by the Securities and Exchange Board of India (SEBI). Upon maturity, the invested amount is redeemed and deposited into the investor's designated bank account.

Gold exchange-traded funds: Gold exchange-traded funds represent tradable units of gold on stock market exchanges. Similar to mutual fund units, ETF units can be acquired for trading on stock exchanges. Initiating your gold ETF investment journey involves selecting a brokerage firm of your choice and commencing trading using your demat account.

Depending on the investment firm, the ETF either mirrors the price of physical gold bullion or the underlying portfolio of stocks from gold mining and refining companies. Notably, there is no mandatory lock-in period, allowing you the flexibility to enter and exit your investment at your convenience. However, it's essential to be aware of applicable brokerage charges and processing fees.

Gold mutual funds: Purchasing units of a gold mutual fund entails investing in a fund dedicated to gold and gold-related assets. The fund manager is responsible for executing asset transactions in accordance with the fund's investment strategy. Among the notable companies offering gold mutual funds are Invesco India Gold Fund, SBI Gold, Nippon India Gold Savings Fund, DSP World Gold Fund Quantum Gold Savings, IDBI Gold Fund, Kotak Gold, and several others.

These mutual funds are susceptible to market fluctuations, implying that the worth of your investment may either increase or decrease. Moreover, there are associated costs when investing in gold mutual funds, including expenses like the expense ratio and transaction fees.

Physical gold: Gold can be easily converted into cash with great convenience, a process that can be carried out globally. When liquidated, its value remains consistent with its solid form, making it an exceptional investment option that provides the flexibility of accessing cash whenever needed. In contrast to some other investments, there's no assurance that you'll retain the same level of gains upon liquidation. Gold boasts remarkable liquidity, as it is readily accepted by nearly all bullion dealers worldwide who are willing to purchase it. Whether it's a local coin shop, a private individual, or an online dealer, there are numerous avenues for selling it in exchange for cash or other items.

Tax implications of investing in gold

Depending on your gold investments, you must know how your gifts, investments, and income from them would be subject to tax.

Taxation of SGBs: Those who have bought SGBs do not have to worry about tax implications as these bonds offer tax efficiency, with no LTCG when held until maturity. Nonetheless, should you opt to sell or redeem your SGBs within three years of acquisition, any capital gains generated will be categorized as STCG. The STCG from SGBs is subject to a 30 per cent tax rate (plus any applicable surcharge and cess). This tax is computed as the variance between the selling price and the initial issue price of the SGB, minus any indexation benefits.

The interest accrued from these bonds is subject to taxation as income from various sources. The specific tax rate applicable to the interest income is determined by the individual's income tax bracket. Also, there is no Tax Deducted at Source (TDS) imposed on the interest income from SGBs. Investors deciding to sell or redeem their SGBs via a stock exchange must remit the Securities Transaction Tax (STT), which amounts to 0.1 per cent of the sale value.

Taxation of gold jewellery and ornaments: In India, gold jewellery is categorised as a personal asset and is exempt from capital gains tax when sold. Consequently, there is no tax liability on the earnings derived from selling your gold jewellery. Nonetheless, when acquiring gold jewellery, you might be liable to pay Goods and Services Tax (GST) on the crafting or making charges. The GST rate on gold jewellery differs from one state to another, but it generally amounts to approximately three per cent of the making charges. The GST is solely applicable to the crafting or making charges of the gold jewellery, and it does not pertain to the actual value of the gold.

Taxation of gold ETFs and gold mutual funds: In India, gold ETFs and gold mutual funds are classified as equity mutual funds for taxation purposes. Consequently, the profits generated from the sale of gold ETFs and gold mutual funds are subject to taxation as equity capital gains.

Capital gains from equity investments are segregated into two main categories: Short-term capital gains and long-term capital gains. Short-term capital gains are taxed at the individual's prevailing tax rate, whereas long-term capital gains incur a 20 per cent tax rate, with the option of benefiting from indexation.

Gold ETFs and mutual funds are eligible for indexation benefits to lower the taxable capital gains. Indexation considers the inflation that has transpired since the acquisition date of these ETFs or mutual funds. Consequently, this results in an augmented effective cost basis for these gold investments, which is used when computing capital gains.

Taxation of gold gifts received: In India, gold received as a gift from close blood relatives is not liable for taxation. However, if gold is received as a gift from non-relatives, it falls under the purview of the Gift Tax Act, 1958, and is subject to taxation. The Act provides an exemption for gifts received from blood relatives.

Before you decide to buy or invest in gold and silver this festival season, know how much you will have to spend on paying taxes on these investment opportunities.