Physical gold vs gold ETF: Which saves more tax when you sell your gold?

Buying gold this Diwali? Before choosing between jewellery, coins, bars or gold ETFs, look beyond the price of gold. The tax you pay when buying and selling can affect your final returns. Gold ETFs have a shorter holding period for long-term capital gains tax, while physical gold attracts GST at the time of purchase.

The tax on physical gold depends on how long you hold it. If you sell jewellery, coins or bars within 24 months of purchase, the profit is treated as short-term capital gains (STCG) and taxed at your applicable income-tax slab rate. If you sell after 24 months, the gain qualifies as long- term capital gains (LTCG) and is taxed at 12.5%, plus surcharge and cess, without indexation.

Suppose you buy physical gold worth ₹10 lakh and sell it after holding it for more than two years for ₹14 lakh. Your capital gain will be ₹4 lakh. Since the holding period exceeds 24 months, the gain will be taxed at 12.5%, plus applicable surcharge and cess, without indexation benefit.

When you buy finished gold jewellery, coins or bars from a jeweller, you generally pay 3% GST on the total transaction value. This includes making charges, even when the gold value and making charges are separately mentioned on the invoice. This purchase cost can affect your overall investment returns.

Gold ETFs have a shorter holding period for long-term capital gains tax compared with physical gold. If you sell gold ETF units within 12 months of purchase, the gains are treated as STCG and taxed at your applicable income-tax slab rate. If you hold them for more than 12 months, the gains qualify as LTCG and are taxed at 12.5%, plus surcharge and cess, without indexation.

Gold ETFs qualify for LTCG treatment after 12 months, compared with more than 24 months for physical gold. This gives ETFs an advantage in terms of the holding period required for long- term capital gains taxation.

The ₹1.25 lakh annual LTCG exemption available for specified equity shares and equity- oriented mutual funds does not apply to gold ETFs. So even though gold ETFs qualify for LTCG taxation after a shorter holding period, investors cannot use this equity-related exemption to reduce their taxable gains.

If you sell your personal old gold or jewellery to a jeweller, the transaction is generally outside the scope of GST, provided you are not selling it in the course or furtherance of business. However, this does not automatically mean the sale is free of tax. Capital gains tax may still apply depending on the circumstances.

Keep purchase invoices for physical gold. If the jewellery is inherited or gifted, maintain documents establishing the inheritance or gift and, wherever possible, the original owner's acquisition details. These records can help establish the source of the gold and determine its acquisition cost when calculating capital gains at the time of sale.

Gold ETFs offer a shorter holding period for LTCG taxation and do not involve the 3% GST charged on buying finished physical gold. Physical gold, however, may suit those who want jewellery or tangible ownership. Your choice should depend on whether you are buying gold for personal use, investment gains or both.