Taxation On Gold ETFs In India
If you had invested in any form of gold in the previous year, you would have received excellent returns. But it's also a fact that investors cannot avoid paying taxes regarding their capital gains from gold investments. When you profit from stocks, gold, or even real estate, you are liable to pay capital gains tax for Gold ETF too.
If you have sold a property and made a profit, you can easily avoid paying capital gains tax if you buy another house. In the case of Gold ETFs, this does not occur. You will have to pay tax with no excuses. So, it’s important to learn about taxation on gold ETFs.
What are Gold ETFs?
Before we discuss taxation on gold ETFs, let us first understand what gold ETFs are. A Gold ETF is an exchange-traded fund (ETF) that seeks to track the price of physical gold. Gold ETFs are flexible, easily accessible, and offer tax advantages. They are linked to fluctuations in the price of gold, and unlike physical gold, which has many service charges, one gold ETF is worth one gram of gold. The ETF provides benefits for both gold investment and stock trading. The value of the Gold ETF rises in parallel with the price of gold. They are also low in risk. Gold ETFs, unlike physical gold, do not incur any manufacturing costs. Gold ETFs also provide investors with high liquidity, and reselling Gold ETFs is much easier than selling physical gold. Furthermore, these funds are placed in your Demat account, making trading simple and seamless.
Recommended Reading: 7 Top Performing Gold ETFs in India
How does Gold ETFs work?
Gold ETFs are similar to other mutual funds, with the exception that mutual funds build a portfolio of various equity and debt securities, whereas Gold ETFs will only hold physical gold. The typical functionality of a Gold ETF is as follows:
- ETF System Creation: The mutual fund sets up Gold units with physical gold as the underlying asset. These units are listed on the stock exchanges for people to invest in.
- Trading ETF Systems on Stock Exchanges: You can invest in Gold ETFs by placing investment orders for ETF units on a stock trading account. The units will be credited or deducted from your Demat account in the same way that regular stocks are.
- Changes in ETF Unit Value: Since the fundamental investments for the ETF units are physical gold, any changes in the gold value will cause the NAV of the Gold ETF to fluctuate. Moreover, there may be some differences due to exchange demand and supply of Gold ETF units, market demand and supply of physical gold, and price.
Reasons to Invest in Gold ETF
Let us look at all of the practical reasons why gold is a better investment medium than other options.
- Easy to Liquidate: One of the primary reasons for making any financial investment is to have a backup in case you need it in the future, and gold is one of the easiest hard assets to liquidate. If you need to sell your gold to earn a living, simply sell it to a buyer of your choice. There are always people who are willing to buy gold.
- Protects Purchasing Power: Gold has been proven time and again to be an effective inflation hedge. The gold rate is currently unaffected by inflation, so you do not have to suffer a loss when inflation occurs and currency rates fall in the world market.
- Creating Wealth: Gold is considered a precious metal, as we all know. It has a special place in any Indian household and is regarded as family wealth; for example, gold jewels are passed down from generation to generation as a legacy and an icon of family wealth.
- Material Resource: Have you attempted to make a financial or real estate investment? If you answered yes, you should know that purchasing gold is much easier than purchasing real estate or anything else. It is secure for people who want to start investing because gold purchases involve very little risk.
Taxation of Gold ETF in India
Now, let us look at taxation on gold ETFs, or how taxes are applied to gold ETFs. When you buy Gold ETFs and then sell them for a profit, you must pay capital gains tax. Capital gains tax is applicable on Gold ETFs sold at a profit, regardless of how long you have held it. According to taxation on gold ETFs, two types of taxes would be applicable: long-term capital gains tax and short-term capital gains tax.
While short-term capital gains earned before the three-year holding period are added to your income and taxed at the current slab rate, long-term capital gains earned after the three-year waiting period are imposed at 20% with indexation benefits. So, according to the act, if the price of your gold rises by 11% per year while inflation rises to 8% during the same period, the tax will only apply to 3%.
As we know, ETFs that invest in gold is traded on the stock exchange. One gold ETF unit is equivalent to one gram of gold. Taxes on the profits gained on the sale of gold ETFs are treated the same as taxes on the sale of physical gold.
Gold ETFs are ideal tax-efficient instruments because their returns are only subject to long-term capital gains tax and are not subject to wealth tax, VAT, or sales tax.
How to invest in gold ETFs?
Gold ETFs, like any other company stock, can be purchased and sold at market prices through the cash segment of stock exchanges. A DEMAT account and a trading account are required to trade in gold ETFs. Units can be purchased online with the assistance of a stockbroker. Once you understand how to invest in a Gold ETF, you can proceed as follows:
- Create an online DEMAT account using a brokerage service.
- Select the ETF listed on the secondary market.
- Use the broker's portal to place an order for the specified units.
- Once the purchase order and the sell order are matched at the stock exchange, a confirmation is sent to your phone or email.
- You can either buy a lump sum or invest systematically at regular intervals.
- A broker can charge a couple of fees small fees for the transaction.
Gold ETF Vs. Physical Gold
- Buying Gold ETF through the secondary market cost you a small number of transaction fees. If you compare it with physical gold it's far cheaper as gold ETFs are free from making and other service charges. Gold ETF units issued to you are linked to your credentials KYC, so you don't have to be concerned about them being stolen, unlike physical gold, which you must keep in a bank locker and pay the bank's locker fees as well. Furthermore, with gold ETF units, you do not have to worry about the purity of gold, which you must confirm with a hallmark when purchasing physical gold.
- Furthermore, with gold ETF units, you do not have to worry about the purity of gold, which you must confirm with a hallmark when purchasing physical gold. You can easily sell your gold ETF units whenever you want, but selling physical gold is a time-consuming process that requires you to visit a reputable jeweler's shop, have all the weighing done, and then negotiate with the jeweler to finalize the sale. It is well known that buyers will never give you the true value of physical gold and will deduct a small amount when you resell it to them, but this is not the case with gold ETF units.
- When compared to physical gold, Gold ETFs offer greater liquidity. Gold ETFs are relatively simple to buy and sell. Gold ETFs are an investment vehicle for all time horizons, whether short, medium, or long term.
Also read: Taxation on Cryptocurrency in India
Conclusion
Gold ETFs are a good option for investors who are looking to hedge their portfolios. Investors who carefully learn all aspects of investing in gold ETFs and conduct the necessary research on taxation on gold ETFs will benefit from gold investments.
Frequently Asked Questions (FAQs)
Do I need a Demat account and a trading account to invest in Gold ETFs?
Yes. Gold ETFs are investment vehicles that, like any other stock, can be traded on the stock exchange. These bonds must be held in dematerialized form for such trading. So, a Demat account and a trading account are required for investing in gold ETFs.
How does one go about investing in gold ETFs?
An investor can invest in gold ETFs via any online trading portal provided by the broker or by calling the broker directly to register their trade-in offline mode.
What purity is assigned to each unit of Gold ETF?
Each unit of Gold ETF weighs one gram and has a purity of 99.5 percent.
Are gold exchange-traded funds actively managed?
No. Gold ETFs, like all other ETFs in India, are managed passively.