All that glitters is gold, particularly now that gains from debt funds, irrespective of the holding period, is set to be taxed as short-term capital gains from 1 April.
Currently, debt funds attract capital gains tax of 20% with indexation benefit if held for more than 36 months.
From April, investments in mutual funds with up to 35% equity exposure to domestic companies are liable to be taxed as per the investors’ income tax slab rate.
“Since gold funds or the exchange traded funds (ETFs) and global funds also invests less than 35% in Indian equities, these categories will also be subject to same debt funds tax treatment,” said Naveen Wadhwa, deputy general manager – R&D at Taxmann publications.
As a result, holding gold in the form of sovereign gold bonds (SGBs) or in the physical form will be more tax efficient than investing in gold funds or ETFs (see graphic), especially if you fall in the higher tax brackets.
From 1 April, gains from investments in gold funds will be taxed at the slab rate (say, 30%) irrespective of the holding period. Whereas, investments in SGB, which comes with a tenure of 8 years, will be tax-free if the amount is withdrawn at the time of maturity. Further, in case of investment in physical gold, the long-term capital gains after three years are taxed at 20% with the indexation benefit. The short-term capital gains are added to your total taxable income and taxed according to your income tax slab.
Note that if you redeem SGB units after 5 years of lock-in or even before 5 years in the stock exchange, the tax treatment applicable to physical gold will be apply for SGBs as well.
Thus, it can be concluded that for long-period of holding gold, SGB is the most efficient structure from taxation perspective, then comes physical gold and lastly comes gold funds or ETFs.
Having said that, investment cannot be made just based on the tax perspective. Investors in SGBs face liquidity issues if they want to redeem the units before maturity. Similar is the case with physical gold. Also, transacting in physical gold attracts goods and services tax (GST) of 3%. For those investors concerned about liquidity, gold funds or ETFs still score well, as per Archit Gupta, founder & chief executive, Clear.
Global funds
If the new amendments in the Finance Bill 2023 comes into force as is, the tax on direct stock investments overseas will be lower than investments in global funds or fund of funds.
According to Sunil Gidwani, an expert in domestic and international tax and regulatory matters at Nangia Andersen India, capital gains in case of overseas stocks held for more than 24 months (36 months for overseas ETFs) prior to selling them attracts tax at a rate of 20% with indexation benefit. While the gains from global funds are taxed at the slab rate regardless of the holding period.
Having said that, any direct investment overseas will attract TCS (tax collected at source) at the rate of 20%. This is as per budget 2023. Though this amount could be used to offset the total tax liability at the end of the year, some capital would be blocked until then.
Also, those who cannot spend time to invest in direct stock picking in the international market would be better off sticking to funds, irrespective of higher tax on gains.