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Gold mutual funds are one of the latest ways of investment. Many people find Tax calculations on them complicated. So, here is your guide to calculating the tax on gold mutual funds.

taxation rules of gold mutual funds

The extraordinary growth in the gold market has made gold an all-time favorite investment option. Traditionally, gold was purchased in the physical form, either in the form of pieces of jewelry, coins or bars. The higher risk of holding physical gold and technological advancement has made paper gold investment options more common.

Paper gold investment includes options like:

  1. Gold mutual funds
  2. Gold exchange-traded funds (ETFs)
  3. Smart or digital gold
  4. Sovereign gold bond (SGB)
  5. Gold future, etc.

All these investment sources attract different tax calculations and fall under different taxation criteria. Likewise, the physical selling of gold falls under either short-term or long-term capital gain. The income tax is levied in the regular tax slab for the gold sold within three years of purchase. Physical gold held for over three years is taxed at 20% after indexation + 4% cess on the income earned.

Also read: Why should you invest in gold?

What are gold Mutual funds?

Gold funds are like other common mutual funds, but the money from these funds is invested directly or indirectly in gold reserves. The investment amounts are generally invested in the stocks of mining companies, specifically metal mining companies, in producing and distributing conglomerates or in physical gold. 

The price of these funds is directly dependent on the rate of the metal in the market. Gold funds are not restrained and are based on the units apportioned by the gold exchange-traded fund.

Tax calculation on Gold Mutual Funds

The taxation on gold funds is calculated similarly to that of gold ornaments. The calculation of tax is dependent on the tenure of funds held. The gold funds held for over three years come under the long-term capital gain. The profit earned in the long-term capital gains is taxed at 20% in addition to a 4% cess.

For the gold funds held for less than three years, their profit is taxed as per the individual's regular income tax slab. Moreover, at the time of trading or maturity of Gold mutual funds, there is no tax deducted at source (TDS) levied by the Income Tax department. 

Advantages of gold Mutual fund

  • Flexible investment option: in comparison to physical gold, the gold mutual fund provides flexibility regarding the amount of the sum invested. The investor can start with the lowest amount of Rs 500 and the multiple of 100. 
  • Liquidity of the investment: gold mutual funds are highly liquid; they can be traded easily without hassle. Liquefying gold investment is the easiest way, rather than any other investment option. 
  • Safer investment avenues: regulated by the security exchange board of India (SEBI), gold funds are the safest investment options. Regular monitoring and periodic reports of the funds help the investor know their money's value to measure and forecast the returns.
  • Less risky than holding physical gold: holding physical gold always carries a lot of risk of theft and safe storage. On the other hand, the electronic form of gold makes it easier and safer to invest in gold without any risk.

Tax calculation on gold exchange-traded funds (ETFs)

For gold exchange-traded funds (ETFs), the long-term capital gain is completely exempted from tax.

Calculation of tax on Sovereign Gold Bonds (SGBs)

SGBs are the securities issues by the government of India with denominated of gram gold. They are popularly known to be the replacement for physical gold holding. The Reserve Bank of India authorizes these Bonds on behalf of the Indian Government.

Sovereign gold bonds are gold bonds which has eight-year maturity period, where you can withdraw money after the completion of the fourth year, that is, from the fifth year. According to income tax law, capital gains earned at the time of maturity are exempted from tax.

If you withdraw your money before maturity via the secondary market, the capital gains are levied tax similar to physical gold or gold mutual funds or gold ETFs.

SGBs pay 2.5% of interest per annum, and there is no TDS levied on the SGBs. The interest earned is taxable as per the individual tax slab.

Calculation of Tax on Gold received as a gift. 

Gold is a gift from family members such as parents, children or siblings; no tax is levied on such gold. If it is accepted by someone who is not a family member, then for the gift of above Rs 50,000, the tax is calculated under the heading of income from other sources. 

Gold is a higher-risk able investment, unlike stocks and bonds. The gold price keeps fluctuating due to global economic markets. But, Diversification is an essential aspect of the investment portfolios, and gold funds and investment in any other form of gold help to diversify the portfolio. Gold is a risk-bearing investment, but the fall in stock markets tends to increase gold prices. Moreover, there are fewer chances of gold prices going down in a long-term period.

Also read: Investing in gold is better option or not?