For instance, a gold sovereign purchased in 2015 for Rs 18,720 could now be sold for Rs 45,320, representing a gain of Rs 26,600. In eight years, besides the pride and gratification of owning gold, one can realize a profit of over 240%.
Several individuals capitalize on this investment opportunity by selling their gold for a profit, which incurs taxation. However, this tax could be reduced by investing the proceeds from the sale of gold in tax-exempt bonds, house construction, or the purchase of a home.
Capital gains tax
The sale of any capital asset, including gold, generates taxable capital gains. When gold is sold within three years of its purchase, the resulting income is considered a short-term capital gain. In this instance, the difference between the selling price and the purchase price would be added to the total taxable income, and Income Tax would be due based on the applicable tax bracket.
However, if the gold is sold after three years, the 20% long-term capital gains tax would apply. In addition, an indexation benefit could be implemented, as the inflation rate would also be considered when determining the purchase price.
Avoiding capital gains tax
The tax is waived if the proceeds from the sale of gold are used to build or purchase a home. However, the property should be acquired within one or two years. Likewise, the tax will not be imposed if the house is completed within three years.
Investing in tax-free government bonds, such as National Highway Authority of India Bond and REC Bond, allows investors to deduct the tax from their income.