How Do I Avoid Capital Gains Tax on Gold?

Gold is not only used for ornamental purposes in India but continues to be one of the most popular forms of investment in households. Gold is 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.

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 jewellery or coins may require the seller to pay the capital gains tax.

What Is Capital Gains Tax?

Capital gains tax is applicable on profit made from sale of capital assets such as a house or a furniture or painting, vehicle, patents, trademark, jewellery. The idea of capital asset is what is not a normal revenue income for the person. So, for example, sale of furniture by a furniture showroom is not a capital asset, but in hands of a car showroom it can become a capital asset. More exception to capital assets has been provided in the form of some agricultural land and some bonds. Capital gains tax was introduced to provide easier tax norm and benefit of indexation for which the capital has been held. Depending on the type of asset and the holding period the income from their sale is classified as long-term capital gain or short-term capital gain.

They can be classified into two categories:

Long-Term Capital Gains:

Income from sale of shares of a listed company, listed debentures, units of equity MF are classified as long-term capital gain if held for more than 12 months. In case of house or a land this period of holding to qualify as long-term capital gains becomes 24 months and for any other asset class it is 36 months.

Short-Term Capital Gains:

Income from any asset held for less than 36 months is classified as short-term capital gains. The exceptions to this are shares of a listed company, listed debentures, units of equity MF where the holding period is less than 12 months and a house or land where the holding period is less than 24 months.

The rules are a little different in the case of shares and mutual funds.

Capital Gains Tax Rate

The tax rates levied on the sale of a gold asset vary from the duration of the gold held by the owner, which will classify it as a short-term capital asset or a long-term capital asset.

Short-term Capital Gains Tax:

This will be applied if the gold is sold within three years of purchase. Such a form of capital gain is added to the income of the individual and is then taxed according to the prevailing income tax slab that the person is eligible for.

Long-term Capital Gains Tax:

This will be applied when the gold is sold after three years of purchase. As per current tax laws, the long-term capital gains tax on gold gains is 20% with an indexation benefit, through which the purchase price of an investment can be adjusted to accommodate the effect of inflation.

Avoid Paying Capital Gains Tax On Gold

One can avoid paying capital gains tax on gold by claiming a tax exemption from the sale of gold assets under Section 54F of the Income Tax Act, 1961.

Section 54F allows income tax exemption on capital gains earned from selling capital assets such as shares, gold, or bonds, if the gains are re-invested in purchasing a house.

The proceeds earned from the sale of the gold asset will be exempt from tax if they are used to purchase a house within one year before the sale of gold or within two years of the sale of the gold.

The proceeds will also be exempt from tax if they are used to build a house within three years of the sale of the gold asset.

Parking Funds In Capital Gains Account

The government has also given provisions to save on tax in case the re-investment of the capital gains cannot be completed within the required time frame.

In case a person is unable to use the full capital gains from the sale of the gold asset into the purchase or construction of a new residential house property before the ITR filing due date, the person can deposit the capital gains into a Capital Gains Account with a public sector bank.

Investing In Government Bonds

The long-term capital gains can also be waived through the investment of the gain in certain specified bonds to claim tax exemption within six months of the date of sale of the gold asset.

Funds can be invested in 54EC bonds, or capital gains bonds that provide tax benefits, such as the National Highway Authority of India bonds, REC bonds, among others. 

The maximum limit for investing in 54EC bonds is Rs. 50,00,000.

Opting For Gold Loan

In case of a short-term need to raise funds, other than investing in a property, to avoid paying tax on the sale of gold, a gold loan may be a more viable option. It allows one to borrow funds easily against gold jewellery or gold coins. The borrower can submit the gold asset as collateral for a loan and retrieve it on repayment of the loan. Therefore, they need not have to part with a family heirloom or a precious asset forever.

Conclusion 

While gold is accumulated as an asset for financial security, its liquidation in large amounts is deterred by the imposition of capital gains tax on its sale.

There are, however, multiple ways to avoid the payment of hefty tax by re-investing the gains earned either for the purchase of a house, investment in tax-saving bonds, or investing in a capital gains account.  

For smaller short-term needs, however, one may opt for a gold loan that allows the borrower to raise funds without having to part with the asset. 

IIFL Finance, one of India's leading non-bank lenders, provides gold loans at competitive interest rates through a quick digital process with minimal documentation. It also offers flexible repayment terms, which allow borrowers to repay the loan without financial stress and improve their credit score.