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How to save Capital Gains Tax on Sale of Gold?


Gold is not only used for ornamental purposes in India but continues to be one of the most popular forms of investment options with Indian households. As per the RBI data, savings in the form of gold and silver ornaments has increased drastically from Rs 38,446 crore in 2020-21 to Rs 59,675 crore in 2021-22.

Gold is also seen as an asset for security to be liquidated in times of any emergency or financial trouble, or to fund any other need that may arise through a gold loan.

But at the time of selling the gold, one must keep in mind the tax implications. In particular, sale of gold whether in the form of jewelry, coins or in electronic form, may require the seller to pay the capital gains tax. It is important to know how gold is taxed at the time of selling.

In this post let us understand – What are the applicable capital gain tax rates on sale of Gold? How to avail Long Term Capital Gains Tax Exemption on Sale of Gold in FY 2023-24 (AY 2024-25)?

Tax Treatment of Capital Gains on Sale of Gold

The investments in gold or gold related products are treated as capital asset under the income tax laws so any gains realized over its acquisition cost is taxed under the head “Capital Gains”.

The capital gain tax rates for selling gold assets vary based on the duration of ownership, which determines whether it falls under ‘long-term’ or ‘short-term’ capital gains.

  • Capital Gains Holding Period :  If the gold is being sold within three years from the date of your purchase then it is considered as short-term, while gold sold after three years is considered as long term.
  • Capital Gains & Gold Tax Rates: Short-term capital gains on sale of gold is added to your gross total income and taxed at the income tax ratesapplicable to your income slab. Whereas, the long-terms gains are taxed at 20.8% (including cess) with indexation benefits.

The above tax treatment is applicable on sale of Physical Gold (purchased by yourself or received under an inheritance), Sovereign Gold Bonds, Gold Coins, Digital Gold bought through Gpay, PayTM etc., These rules are also applicable for the gold mutual fund units bought before 1st April 2023.

However, with effective from the Financial Year 2023-24, the gold mutual funds fall under the category of Specified Mutual Funds for income tax purposes. The capital gains are thus treated as Short-term irrespective of the holding period of fund units and are taxable at the applicable income tax slab rates.”

We have now understood that there is a certain rate of tax that we need to pay on capital gains from Sale of Gold. Are there any provisions to avoid this capital gain tax?

Please note that Capital gains tax on short term gains is unavoidable,and no tax exemptions are available to minimize your tax liability. However, you can claim deductions to lower the tax liability on long-term capital gains from sale of gold investments.

So, long term capital gain tax exemption options are available on sale of Physical gold, Sovereign Gold Bonds, Digital Gold and units of Gold Mutual Funds bought before 1st April 2023.

How to save Long Term Capital Gains Tax on Sale of Gold?

Below are the ways one can save on long term capital gain tax from Sale of Gold in FY 2023-24;

  • Under Section 54EC, by re-investing the Long Term Capital Gains in Capital Gains Govt Bonds.
  • Under Section 54F, by investing the Long-Term Capital Gains in a residential house.
  • Reinvesting the Gains in Capital Gains Saving account.
Section 54EC Section 54F
Who can claim the exemption? Any person Individual / HUF
Asset sold / transferred Any long term capital asset like Gold
(except Gold Fund units bought after 01-Apr-2023)
Any long term capital asset like Gold
(except Gold Funds bought after 01-Apr-2023)
Minimum Holding period of Original Asset 2 years 2 years
New Asset to be acquired Notified Capital Gain Bonds Residential house
Time limit for new investment within 6 months Purchase :
1 year backward (or)
2 year forward.
Construction:
3 years forward.
Exemption Amount Investment in the
new asset or capital gain,
whichever is lower (max Rs 50 Lakh)
(Long Term Capital Gain * Amount invested in new house of upto Rs 10cr)
divided by Sale proceeds of original asset ie Net consideration
Captial Gains Tax Exemption Options on Sale of Gold for FY 2023-24AY 2024-25)

How to save LTCG Tax on Sale of Gold by claiming Exemption u/s Section 54EC?

  • Long-term Capital gains from sale of Gold can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset.
  • These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.
  • The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
  • The Bonds issued u/s 54EC for saving of LTCG on sale of Gold have a lock-in period of 5 years instead of 3 years w.e.f FY 2018-19.
  • You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).
  • You can invest a maximum of Rs 50 lakh during a financial year in these Capital Gains Tax Saving bonds.

How to avoid Long-Term Capital Gains Tax u/s 54F on Sale of Gold?

  • You can use the sale proceeds (received by selling gold) to buy a new house or to build a new residential house.
  • If you use a part of the money, the deduction will be proportion of the invested amount to the sale price.
  • The new house has to be bought one year before (under-construction property) the transfer of the first house or within two years after the sale. (For an Under-construction property or flat, the construction has to be completed within three years of the transfer of the first property.)
  • You should not own more than one residential house prior to this investment.
  • The deducted capital gain (from sale of gold) becomes taxable if you buy another house (other than the new one) within two years of the transfer of the original asset or construct a new one within three years.
  • If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
  • This new house purchased or constructed must be situated in India.
  • The proceeds should not be invested in a commercial property or in another vacant plot.

With effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54F. In case the cost of the new property (capital asset) exceeds Rs. 10 crores, the excess amount shall be ignored for computing the exemption under Section 54. Up to FY 2022-23, there was no tax exemption ceiling limit u/s 54F.

Capital Gains Account Scheme

If you are unable to invest the sale proceeds in any of the above options before the date of income tax returns filing, you can deposit the Long-Term CAPITAL GAINS (not entire sale proceeds) amount in a public sector bank or other banks as per the Capital Gains Account Scheme- CGAS, 1988.

With effective from 1st April , 2023 (i.e. A.Y. 2024-25), Capital gain of upto to Rs. 10 Crore can be deposited in CGAS.

  • CGAS is only a stop-gap arrangement, until the funds are used to purchase or construct a new residential property.
  • The deposited money can be used only to buy or construct a residential house within the prescribed time frame.
  • If you withdraw funds from this account, they have to be used within 60 days.
  • If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.
  • The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.

To put in a nut-shell;

  • If you have LTCG on sale of Gold, to save tax,
    • You can invest the gains in another Residential property (or)
    • Buy Notified Capital Gain Bonds (or)
    • Temporarily invest in Capital Gains Account Schemes.

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(Post first published on : 03-Oct-2023)

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