Gold ETFs Taxation: All you Need to Know

The Gold ETF (exchange-traded fund) is one of the hassle-free options to buy gold. As an investor, you can invest in gold and hold it electronically in your DEMAT account without actually buying it physically. It eliminates the need to buy gold physically and manage its storage and safety. 

Gold ETF taxation scores above the taxation policy on other forms of gold. Here’s a brief guide on decoding gold ETFs, how you can buy gold ETFs, understanding gold ETF taxation in India, and taking advantage of its tax benefits. Continue reading to learn more about gold ETF taxation in India.

What is a Gold ETF?

The Gold ETF is an exchange-traded fund and works similar to mutual funds. The fund collects money from investors, and the fund manager buys physical gold of 99.5% purity (24 carat) as the underlying asset. The ETF units are allocated in denominations of one gram of gold. 

You can buy and sell your gold ETF units on the BSE and NSE. Reputed large fund houses manage your money in gold ETFs, ensuring safety and peace of mind for the investor. The trading in gold ETFs on stock exchanges is permitted only in the cash segment. With gold ETFs, you can easily add gold to your investment portfolio as a stable, risk-free investment that acts as a hedge against inflation and adverse market conditions.

Gold ETF Taxation in India

Before you select any investment to park your money, it is crucial to understand the taxation in detail. Gold ETF taxation in India has two components:

1. Tax while you purchase: When you purchase physical gold, you need to pay GST, sales tax, wealth tax, etc. along with a surcharge. No such tax applies while buying gold ETFs.
2. Tax upon sale: When you sell an ETF, there are two scenarios to calculate the gold ETF tax:

• Sale within three years: When you sell your gold ETF within three years of unit purchase, you generate short-term capital gains. These gains are taxed at the income tax slab rates applicable to you.
• Sale after three years: When you sell your holding after three years of purchase, you incur a Long Term Capital Gains Tax on gold ETFs at the rate of 20% with indexation.

With recent changes in Budget 2023 above taxation has changed for investor buying on or after 01st April 2023:

All the gains now will be classified as short term capital gains and taxation will be as per your applicable tax slab.

Benefits of Investing in Gold ETFs

Investing in gold ETFs offers several benefits over other investment options:

Purpose

In India, people purchase gold jewellery with a dual purpose. It is meant for personal use, vanity, gifting, etc., and also as an investment to tide over any bad times or financial crunch. Rarely is this “investment” put to use for making any profits. A certain emotional attachment to physical gold makes it difficult to part with. Gold ETFs, on the other hand, are pure investment vehicles. There is no other purpose but to earn returns and it is, thus, a far more efficient way of buying gold.

Ease of investing

Since Gold ETFs are digitally held securities in Demat form, you don’t need to handle or store physical gold or jewellery. You can buy gold ETFs through your DEMAT and trading account from the comfort of your home with a click. It makes monitoring the portfolio and making a buy/sell decision easy and convenient. There is no need to worry about keeping your collection safe from theft or loss.

Quantum of investment

Gold ETFs are available for purchase in denominations of 1 gram of gold. The minimum investment, therefore, is the price of one gram of gold. When you buy physical gold, you need to shell out a large sum for the purchase.

Trading

You can buy and sell gold ETFs and make the best returns from price fluctuations. Physical gold stays idle in your bank locker and does not earn any interest until sold.

Pricing

Gold ETFs offer a common price matched to the rate of physical gold in the market. Physical gold prices can vary from one city to another due to variations in state level and other taxes. It impacts your purchase price.

Additional expense

When you buy physical gold, you pay GST on purchase and labour charges, sales tax, etc. There are no such taxes levelled on ETFs. All mutual funds have an expense ratio to take care of the management and handling charges. These charges are nominal in gold ETFs as there is only one underlying asset and no frequent management or transactions are needed.

How to Invest in Gold ETFs

Investing in gold ETFs is simple; here’s a step-by-step process:

• The first step is to open a DEMAT and trading account with a registered broker; since the units are allotted only in dematerialised form, no paper transaction is involved.
• You must submit your PAN, Aadhar, and other KYC documents to open a DEMAT and trading account. After document and form submission, it takes 2-3 working days to activate the account.
• Log into the broker’s website and select the gold ETF you want to invest in.
• You can buy the units as a lump sum investment or set up a systematic investment to purchase units every month.
• Once you place the buy order, funds are debited from your account and units are logged in your DEMAT as per the market settlement.

Do not forget to check the gold rate while placing the order. You can compare the prevailing rates to past price movements. Every brokerage platform charges a brokerage fee for the order placed. It is advisable to check the rates and select the platform that gives you the best rates and services. 

Takeaways

Gold is a universal asset class that offers stability and value in your portfolio over the longer term. Tax benefits on gold ETFs in India make them a tax-efficient instrument to add a dollop of gold to your portfolio strategy. In addition to equity, debt, fixed income, and real estate, pick gold ETFs and enjoy the flexibility to trade and invest in gold. 

FAQs related to Gold ETF Taxation