If you have been religiously investing in gold around every Diwali for the last 10 years, you must be a rich person now. The yellow metal has risen three-fold in the last decade. However, before you think of taking out your gold from the locker and selling it to realize the gain, pay attention to the tax that you need to cough up on it. Like any other investment gold attracts tax. Gold is considered a capital asset by the tax authorities in line with shares, debentures, bonds, mutual fund units, immovable property. And any capital gains on it comes under tax net too. Here are the tax implications of holding gold in the physical form.
The tax on the gold proceeds depends on the duration for which you have held it:
Less than 3 years: If you plan to sell your gold within three years from the date of purchase, the gains realized from it are termed as short-term capital gain but are treated like any other income. They are added to your income and taxed as per your income tax slab.
More than 3 years: In case you have held the asset for more than 3 years, any gain arising on it will be termed as long-term capital gain. In such cases it is taxed at 20.6 per cent (including education cess) with the indexation benefit. The latter increases the purchase price of the asset and reduces the capital gain
Let's see how it is done. Suppose you had invested in gold to the tune of Rs 50,000 a decade back, which has now appreciated to Rs 1,50,000. On the face of it, you have made a gain of Rs 1 lakh and need to pay 20.6% tax on it. But if you take the indexation benefit, the actual tax outgo will be lower. Here's how
Firstly, apply the cost of inflation index on the cost of purchase
The formula to calculate the cost inflation index is as follows:
Cost Inflation Index (CII) = CII for the year the asset was transferred or sold / CII for the year the asset was acquired or bought. In this case it is CII=1125/551, which is 2.04
Secondly, multiply this with the purchase price. You get an inflated price or indexed cost of purchase of gold i.e Rs 1.02 lakhs
Thirdly, deduct this amount from the sale price to arrive at the actual gain. Deducting the indexed cost of purchase of gold from the sale price of gold leaves a capital gain of nearly Rs 50,000, in place of earlier Rs 1 lac. The tax will be levied on it.
Protecting your gains
The good news is like any other capital gain you can claim exemption on such indexed long term gains by investing the amount of such capital gains in residential house or infrastructure bonds issued by NHAI and REC.