Gold is one product that has multiple tax rules applicable when you buy and sell, depending just on the way you hold the yellow metal.

There are four modes of buying gold, with varying degrees of popularity.

Physical gold: This is usually held in the form of jewellery and coins or bars

Digital gold: An electronic mode of investing in gold doesn’t require you to hold it physically; the precious metal is held in vaults on your behalf. Transaction is done via wallets or platforms.

Gold ETF: Gold exchange traded funds are offered by mutual funds. You can redeem them for cash by selling in the market or you have the option of taking gold in return.

Sovereign gold bonds: SGBs are issued by the Reserve Bank of India and track gold prices. Each bond represents one gram of gold. An interest of 2.5 per cent is paid on these bonds.

Taxation rules differ; therefore, it is important for you to know what you must pay when you sell gold in a specific form.

Jewellery sale indexation benefit

When you wish to sell your jewellery, bars or coins that you bought or received as inheritance, the holding period must have been at least 36 months for the gains to be classified as long-term.

Now, it would be good to maintain invoices of gold purchased to establish the holding period. In the case of inherited jewellery, invoices or Will or any other document to establish the time of purchase may be useful. The holding period starts from the time the jewellery, bar or coin was purchased by the original owner in the case of inheritance. Indexation benefit is available for long-term gains.

Long-term capital gains are taxed at 20 per cent (plus 4 per cent cess) after indexation.

 In the case of digital gold, it is just physical gold held in vaults by companies on your behalf. Therefore, the same tax rules apply for digital gold.

Short-term gains in both cases are added to your income and taxed at the slab applicable to you.

ETFs fully taxable, SGBs get kinder treatment

If you aren’t keen on holding physical gold, but hold it in electronic or paper form via exchange traded funds (ETFs), the recent Budget has made any sale of units taxing.

Starting April 1, when you buy ETFs and sell them after any holding period, short-term or long term, there is no differentiation in tax treatment. The gains are added to your income and taxed at your slab.

Earlier, if you sold ETFs after holding for three years, the gains were treated as long-term and taxed at 20 per cent after indexation.

Along with debt mutual funds, gold ETFs and international funds faced the taxman’s brunt after Budget 2023, as indexation and any classification of long and short term were removed.

Sovereign gold bonds enjoy the best tax treatment by far across the various modes of holding gold.

The 2.5 per cent coupon that is given is added to your income and taxed at your slab.

But capital gains tax varies and depends on the holding period.

When bonds are purchased in the primary issue and sold at maturity: When you buy any SGB series during the time of its issue and hold it till the eight-year maturity period, capital gains are fully exempt. Even if the RBI redeems these bonds after a five-year period, and you tender the SGBs, the gains are tax free.

When bonds are bought in the exchanges and sold at maturity: The gains made by buying in the secondary markets and selling it at maturity back to the RBI are fully exempt.

When SGBs are bought and sold in the secondary market: The gains are considered long term after a holding period of one year, since these are listed bonds. Long-term gains are taxed at 20 per cent (plus cess) with indexation. Short-term gains are taxed at your slab.

When SGBs are bought in the primary issue and sold in the exchanges: Here again, gains made after a holding period of one year are taxed at 20 per cent (plus cess) with indexation benefit. Short-term gains are taxed at your slab.