Gold Investment: What You Need to Know Before Selling Your Gold Jewellery and Gold ETFs

Major Reforms in Capital Gains Taxation of Gold as of July 23, 2024

In a landmark step towards aligning tax treatments of different classes of investment assets, the government has introduced major amendments to rules of capital gains taxation on gold as of July 23, 2024. These changes affect all asset classes such as gold, mutual funds, and real estate, with direct impact on gold investors and gold jewellery sellers.

According to the new rules, the tax levied on the profits earned through the sale of gold jewellery mainly hinges on ownership duration. The jewellery owned for more than three years is classed as an LTCG and is taxed at 20% after indexation relief. On the other hand, jewellery purchased in a three-year period will be considered short-term capital gains (STCG) and taxed according to the individual‘s relevant income tax slabs. These amendments are aimed at encouraging long-term investment in gold.

The regulations regarding inherited jewellery have also been made clear, specifying how the acquisition cost needs to be calculated. Inherited jewelry is treated as a capital asset, with the cost basis established at its fair market value (FMV) of April 1, 2001, if acquired before this date. The holding period of these assets is tracked back to the date of initial purchase by the ancestor, with profits ready to qualify for LTCG treatment if held for over three years, thereby securing favorable tax treatment for long-held family heirlooms.

In the case of computing taxable capital gains, the equation is simple: Sale Price minus the Acquisition Cost (FMV as of April 1, 2001) equals the Long-Term Capital Gain (LTCG). What‘s interesting here is that LTCG gains on gold sales are charged at a rate of 12.5%, along with applicable surcharges and cess. In cases of unavailability of purchase invoices, taking valuation from a registered valuer can help determine the correct cost basis.

Additionally, consumers of gold jewelry also need to pay a Goods and Services Tax (GST) of 3% on the overall price, along with any making charges. Interestingly, no income tax is charged on buying gold jewelry.

Capital Gains Tax on Gold Mutual Funds and ETFs
The new capital gains tax regulations also cover gold mutual funds (MFs) and gold Exchange-Traded Funds (ETFs). From April 1, 2025, these financial assets will be controlled by the recently introduced tax policies. All profit from investments maintained for more than 24 months will be termed as LTCG, with a 12.5% rate of taxation with no indexation advantage. Profits made by selling within these 24 months will be referred to as STCG and charged at the investor‘s income tax rate.

The reform is a result of the government’s revised definition of debt mutual funds that will come into force on April 1, 2025. According to the new criteria, a mutual fund will be deemed a debt mutual fund if it invests more than 65% of its total proceeds in money market instruments and debt.

For those who have invested in gold mutual funds, disposal prior to 24 months will result in STCG being charged as per personal tax slabs. But sold after 24 months, it will be termed as LTCG and charged at 12.5%. In the case of listed gold ETFs, disposals prior to 12 months will be regarded as STCG, whereas the ones disposed off after 12 months will attract LTCG with the same rate of 12.5%.

Taxpayers should keep in mind that until March 31, 2025, the old tax rules will apply. The new capital gains tax regime for gold mutual funds and gold ETFs becomes effective from April 1, 2025.

Investors are advised to approach tax experts to guide them through these changes efficiently and maximize their investment plans under the new tax system.