The gains on capital assets are taxed under I T Act. Both physical gold and Gold ETF units are assets under Income Tax Laws. So , sale of these assets gives rise to capital gains or loss. The question is if you have to invest in gold, what should be invested- gold ETF units or gold so that the liability to tax is less. Readers may do well to read Four answers to simplify what is Gold ETF !
The tax advantage of buying Gold ETF are
- Low tax rate
- Early availability of capital gains exemption
- Wealth tax exemption
Long term capital gains arise on sale of long term capital asset and short term capital gains arises on short term capital asset.Income tax Act prescribes lower rate of tax @ 20 % for long term capital gains. But even lower tax rate @ 10 % is applicable on long term capital gains on sale of shares or mutual fund units. This is provided in section 112 of the I T Act. In contrast ,short term capital gains are charged to normal rate of tax or 15% in case of shares or units on which STT is deducted.
This distinction is important .
Gold and goldETF both are capital asset. However, different tenure is fixed for terming the asset as short term or long term. Since goldETF is a mutual fund units , it becomes long term capital asset within a year whereas gold will have to wait for three years to get the status of long term capital asset.
So, if you sell the goldETF after one year , you will pay just 10 % of gains as tax , whereas in case of gold sale after one year , tax rate will be much higher as it is general rate of tax which will be applicable.
Income tax provides benefit of exemption u/s 54F and 54EC in case one one wants to save tax on long term capital gains. You can read about section 54F & 54EC here.
Since , in just one year , goldETF becomes long term capital gains, these exemptions u/s 54F or 54EC are available to an investor whereas for that an investor in actual gold will have to wait for three years.
Shares and units are not wealth under Wealth Tax Act whereas the gold is wealth.So, you are liable to pay wealth tax if the value of gold plus other asset exceeds Rs 30 lakhs . No such question arises in case of goldETF because it is unit of mutual fund and therefore out of definition of wealth under W.T Act 1957.