Almost all of us own or have owned gold at some point in our lives. Investing in gold has really fascinated Indians for decades, especially when it comes to special occasions like festivals and weddings.

It has truly been one asset class that we have had no apprehensions about and rightly so because gold has delivered up to 12% returns in last two decades.

It’s not just physical gold or gold jewellery but also SGBs and ETFs that have interested Indians.

Undoubtedly, gold is an important asset class for Indian investors as it offers diversification and reduced portfolio volatility. But it is essential to grasp tax implications for a well-informed investment strategy. 

So, let’s dig deep and find out.

Taxation of Sovereign Gold Bonds

Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold.

Sovereign Gold Bonds (SGBs) in India offer a fixed interest rate of 2.50%, credited semi-annually. SGBs in India are subject to taxation, both on interest income and capital gains. There are three parts to taxation of these gold bonds:

On Interest: 

While there is no TDS, interest income is taxed based on your applicable tax slab.

On Capital Gains

Capital gains arise from appreciation in the price of SGBs. If you purchase gold at Rs 60,000 per 10 gram and it rises to Rs 66,000, your capital gains are Rs 6,000. 

Now, SGBs mature after eight years, with an option for early redemption after five years. The profits upon final redemption are entirely tax-free.

For redemptions before maturity:

Short-term Capital Gains Tax: If sold within 1 year of investment, your gains are treated as short-term capital gains, taxed at your slab rate.

Long-term Capital Gains Tax: Selling after 1 year incurs Long Term Capital Gains (LTCG) tax. It’s either a flat 10% without indexation benefit or 20% with indexation benefit. You can choose whichever is lower. 

Don’t Forget that long-term capital gains will be taxed at 20% with an indexation benefit if the SGB is redeemed after the lock-in period of 5 years but before the maturity period of 8 years.

Taxation of Physical or Digital Gold

Physical Gold: This includes jewellery, coins, and bars. Long-term capital gains tax is applicable on selling physical gold after three years at 20.8% (including cess) with indexation benefits.

Short-term capital gains (STCG) are taxed based on your income slab for gold held less than 36 months.

As far as digital gold is concerned, digital gold bought online and stored in vaults is subject to same tax rate as physical gold. 

Also Read: How does Gold Saving Scheme by jewellers work?

Taxation of Gold ETFs

Earlier, just like debt funds, gold ETFs used to attract a capital gains tax of 20% with an indexation benefit if held for more than 36 months.

However, the Finance Ministry changed the debt fund taxation rule in April 2023: 

“From April 2023, capital gains from mutual funds with less than 35% invested in equities would now be taxed at the investor’s income tax slab rate with no indexation benefits, irrespective of how long they are held.”

Since gold exchange-traded funds (ETFs) also invest less than 35% in Indian equities, these categories are now subject to the same debt funds tax treatment.

Taxation of gold investments: Comparison

To answer this question, let’s consider an example. 

Your friend invested Rs 50,000 each in Physical Gold, SGB, and Gold ETF. He belongs to the 30% tax bracket.

Now, let’s assume that he invested for eight years and makes 10% returns on each of these investments.

So, which one did better?

Physical Gold	SGB	Gold ETF
Invested Amount: Rs 50,000	Invested Amount: Rs 50,000	Invested Amount: Rs 50,000
Duration: 8 Years	Duration: 8 Years	Duration: 8 Years
Tax: 20.8% with indexation	Tax: No Tax on Maturity	Tax: Tax as per slab rate
Avg. Returns:  10%	Avg. Returns:  10%	Avg. Returns: 10%
Extra Cost: 3% GST	Extra Cost: 0	Extra Cost: 0.5% Expense Ratio
Final Returns: Rs 1.05 lakh	Final Returns: Rs 1.07 lakh	Final Returns: Rs 89,290

As you can see, SGBs turn out to be a better option for investing in gold.

Overall, if we had to rank them in terms of taxation then: SGB comes 1st, Physical Gold 2nd, and Gold ETF takes the 3rd position.

However, one must consider liquidity challenges when it comes to SGBs and Physical Gold.  

Therefore, all the factors must be considered before making an informed decision.

Disclaimer: The above content is for informational purposes only. The 1% News recommends consulting a SEBI-registered financial advisor before investing in gold.