ACCOUNTING & TAXATION:
Capital Gains Tax and GST on sale of Gold, Jewellery, Sovereign Gold Bonds and Gold Exchange Traded fund (ETT)
Thinking of selling gold during Novel Coronavirus pandemic to meet day to day expenses? check Capital Gains and GST implications on such sale.
Before I jump into the topic, let me first explain, why investing in gold has some fundamental issues. The main problem with gold is that, unlike other commodities such as oil or wheat, it doesn’t get consumed. Once gold is mined, it stays in the world. On the other hand, if oil is mined, the crude oil gets refined into to gasoline, fuel oil, Aviation gasoline, hydrocarbon gas liquids, lubricants, waxes, petroleum coke etc. and gets consumed. Grains also get consumed in the food we and animals eat. Gold, on the other hand, turnsinto jewellery, used in arts, and put to variety of other uses. Regardless of gold’s final destination, its chemical composition is such that the precious metal cannot be used up and it is permanent in nature.
Because of this, the supply – demand argument that can be made for commodities like oil and grains etc. doesn’t hold so well for gold. In other words, the supply will only go up over time, even if demand for gold decreases.
Like no other commodity, gold has held the fascination of the human societies since the beginning of the record time. Empires and kingdoms were built and destroyed over gold mercantilism. As societies developed, gold was universally accepted as a satisfactory form of payment. In short, history has given gold a power surpassing that of any other commodity on the planet, and that power has never really disappeared even today. In the credit society, monetary system effectively controls the expansion of credit and enforces the discipline of lending standards, since amount of credit created is linked to the supply of physical gold. From a fundamental perspective, gold is generally seen as a favourable hedge against inflation. Gold functions as a good store value against a declining currency. Also, it is a practise in India to keep gold as last resort for any emergency.
How on sale of gold, capital gains taxes levied under Income Tax Act, 1961?
Capital gain is rise in the value of capital asset that gives higher worth than the purchase price. Generally, the gain is not realised until the capital asset is sold. A capital gain may be short term or long termand that depends on the period of holding. Let us understand, the definitions of ‘Capital Asset’, ‘Transfer’, ‘Short Term Capital Gains’ and ‘Long Term Capital Gains’ under Income Tax Act, 1961 one by one.
Section 2(14) “capital asset” means—
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—
(a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art.
Explanation 1. —For the purposes of this sub-clause, “jewellery” includes—
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
From the above definition it is very clear that Jewellery is excluded from the exclusions and indirectly included in the definition of capital gains, and it includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel.
Let me also explain why Jewellery is bought under the definition of capital asset under Income Tax Act, 1961, in case of H Maharaja Rana Hemanth Singhji v/s Commissioner of Income Tax, Rajasthan held in Supreme Court, that Maharaja Shri Udebhan Singhji of Dholpur died on October 22, 1954. On the day following his demise all the movable valuables (including large number of gold sovereigns, silver rupee coins and silver bars, which were used at the time of the puja of deities on special religious festivals or rituals) possessed by him were taken over and sealed by the Government of Rajasthan because of the dispute regarding succession to the gaddi. On December 13, 1956 Maharaja Shri Hemant Singhji, the appellant, who was then a minor, was recognised by the Government of India as successor of the former Maharaja and the aforesaid assets were released by the Rajasthan Government and handed over to Rajmata in her capacity as the adoptive mother and guardian of the appellant. During the financial year 1957-58, the aforesaid sovereigns, silver coins and silver bars were sold at the suggestion of the Government of India. The court opined that the asset is considered as personal effects if it is meant for personal use. Mere placing of gold ornaments or jewellery in the showcase is not considered as personal effect as and thus gold is classified as capital asset. As per section 2(14), jewellery is not considered as personal effect also jewellery includes, ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel and precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
Section 2(47) “transfer”, in relation to a capital asset, includes, —
(i) the sale, exchange or relinquishment of the asset; or
(ii) ……….; or
(iii) ………; or
(iv) ………; or
Section 2 (42A) “short-term capital asset“ means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.
Section 2 (29A) “long-term capital asset“ means a capital asset which is not a short-term capital asset.
From the above set of definitions, it is clear that Jewellery is taxable at the time of sale and taxability depends on the period of holding. Income Tax on Short term capital gains are to be paid if period of holding is less than 36 months or 3 years and tax on Long term capital gains are to be paid if period of holding is more than 3 years’ subject to benefit of indexation.
Income Tax implications on Gold Bonds:
India has long been a nation where people have been attracted to gold as an asset class. Indian households are estimated to be holding nearly $1 trillion worth of gold in the form of bars and jewellery. Over last few years’ government has introduced the Gold Bond Scheme which enables investors to holds gold in dematerialised from. These bonds are issued periodically by the RBI and are sold through the various banking channels as well as post offices and other authorised agents. The gold bonds are denominated in grams of gold and the prices of these Bonds are determined by the RBI at the time of each tranche based on the average price. The price is normally fixed slightly lower than the prevailing market price to attract investors. Since these Bonds are denominated in grams of gold the actual holding in grams does not change, what changes is the value of the gold bond holdings as price fluctuate in the market. Effectively, it is as good as holding physical gold and participating in the price fluctuations without hassles of storage.
Investors in these bonds also get additional benefit of annual interest of 2.5% apart from participating in the price fluctuation. The limit of purchase of gold bonds is 4 KG per person per year.
Interest on gold bonds are taxable in the hands on the recipient and there is no TDS on the interest pay out. Tax rate will be as per individual tax slab to be reported under the head of “Income from other sources”.
These bonds shall mature at the end of 8th year and the proceeds are tax free on maturity. However, in case an early redemption is exercised during the window that opens at the end of 5 years where you can redeem your gold bonds or if you plan to sell the gold bonds in the secondary market, then capital gains tax will be applied. LTCG (if held for more than 3 years) at applicable tax rate of 20% (with applicable surcharge and Cess) after considering the benefit of indexation. In case of STCG, tax will be as per individual tax slab.
Income tax on gains from gold ETFs, gold mutual funds
Gold ETFs are securities that track the metal’s prices and they are traded on stock exchanges. Gold mutual funds or MFs in turn invest in gold ETFs. Gains from sale of gold ETFs or gold MFs are taxed similarly to that of physical gold.
GST implications on sale of Gold:
As per the press release dated 13th July 2017, the CBIC clarified that the sale of old gold jewellery by an individual does not attract GST as it is not a transaction in the ordinary course of business and hence the said transaction does not qualify to be a supply and hence it will not attract any provisions of GST and hence no GST is payable. No GST is payable even on sovereign gold bonds, Gold EFT and Gold Mutual Funds.
Hence, currently the tax implications on sale of gold, gold bonds, gold EFTs and gold Mutual Funds attracts only income tax as explained above. Make a wise decision considering other factors too and stay safe in these testing times.