Income tax on gold: SGB vs gold ETF vs physical gold. Know taxation rules here (2024)

FAQs

Is gold ETF taxable income? ›

Gold exchange traded funds (ETF): Earnings made on ETFs are taxed as per income tax slab regardless of when you sell them.

Such long-term capital gains would be taxable at 20% plus applicable surcharge and education cess after considering the indexation, or 10% plus applicable surcharge and education cess without indexation, whichever is more beneficial.

If the price of gold goes up, then the capital appreciation will benefit the SGB and also the gold ETFs. The difference lies in the interest paid. For instance, SGBs pay an additional assured interest of 2.50% per annum, but such assured returns do not exist in gold ETFs.

According to the World Gold Council, gold returned an average of 7.78% per year between 1971 and 2022. 8 Physical gold storage and insurance fees for small investors are usually higher than 0.4% per year. Therefore, gold ETFs are an efficient vehicle for investing in gold.

Metals ETFs

If your gain is earned for more than a year, you are taxed at a capital-gains rate of up to 28%. 21 This means you can't take advantage of normal capital gains tax rates on investments in ETFs that invest in gold, silver, or platinum.

ETFs can bypass taxable events using the in-kind redemption process, while also purging their portfolios of low-cost-basis securities to help portfolio managers avoid realizing large gains if they must sell holdings. But not all ETFs create and redeem shares in kind.

Unlike physical gold, SGBs do not carry any risk of theft or robbery for they are a digital form of gold, traded via demat accounts. SGBs provide an annual interest of 2.5% which give it an edge over investing in physical gold. The minimum investment in SGBs is one gram.

Lack of Liquidity

SGBs have a fixed maturity period, and liquidity can be a challenge if you need to sell them before maturity. You may have to rely on the secondary market, which can have varying prices.

A Gold ETF may not be fully backed by physical gold

The other disadvantage of investing in a gold ETF is that, while most of those fund managers do hold the gold they claim they hold, that may not be true for all of them.

GLD is considered by many to be the premier gold ETF on the market. That's because this $62 billion gold fund is one of the most convenient, low-cost, highly liquid ways any investor – large or small – can participate in the gold market and benefit from the inflation protection that owning gold offers.

Why is physical gold over ETFs? ›

Physical Gold: Physical gold is less susceptible to market fluctuations and is often viewed as a stable store of value, especially in times of economic uncertainty. Gold ETFs: While ETFs provide convenient market exposure, they are subject to stock market volatility, fund management risks, and tracking errors.

The minimum quantity e-gold units can be converted into 1gm gold coin, and in denominations of 8gm, 10gm, 100gm and 1kg or in combinations of these multiples. 1 unit of e-gold is equivalent to 1gm of gold. General applicable charges are Rs. 200 for 8gm and 10gm, Rs.

Gold ETFs are an asset class you must consider to give protection to your portfolio. Once you grasp these basics, you are good to allocate a part of your portfolio to gold ETFs.

Tax Implications

Gold ETFs are structured as securities, and their gains or losses are subject to capital gains tax when sold. This tax treatment differs from physical gold, which may have different tax implications based on how and when it is sold.

Under current law, gains recognized by individuals from the sale of "collectibles," including gold bullion, held for more than one year are taxed at a maximum U.S. federal income tax rate of 28%, rather than the 20% rate applicable to most other long-term capital gains.

The ETF is a financial instrument like a fund, investment trust or stock so is not tax free in all circ*mstances.