Tax rules you need to know for gold and silver ETFs

Investors have poured record sums into gold and silver funds, with their exchange-traded funds (ETFs) garnering Rs 33,503 crore in January—exceeding inflows into equity funds for the first time. Heightened volatility in precious metals over the past year has prompted investors to undertake intraday, short-term and long-term transactions in these schemes. A look at the capital gain or loss tax structures in precious metal funds.

HOW ARE GAINS IN PRECIOUS METAL ETFs TAXED FOR INVESTORS?

Investors holding gold or silver ETFs for more than one year pay 12.5% long-term capital gains (LTCG) tax; those holding for less than one year pay 20% short-term capital gains (STCG) tax. For gold or silver funds of funds, the holding period for 12.5% LTCG is two years or more; if sold before two years, gains are taxed as per the investor’s income-tax slab.

IF AN INVESTOR HAS BOOKED LOSSES WITHIN ONE YEAR OF HOLDING, CAN SHE SET THEM OFF AGAINST OTHER ASSET CLASSES?
Yes. If an investor sells gold or silver ETFs or a fund of funds within one year and incurs a short-term capital loss (STCL), the loss can be set off against short-term or long-term gains from stocks, other ETFs, or equity-oriented mutual funds.

LONG-TERM CAPITAL GAINS OF UP TO Rs 1.25 LAKH PER YEAR ARE EXEMPT FROM CAPITAL GAINS TAX. ARE GOLD/ SILVER ETFs OR FUNDS OF FUNDS ELIGIBLE FOR THIS EXEMPTION?
No. Long-term capital gains tax benefits of up to Rs 1.25 lakh per annum are available only for equity-related instruments. Gold and silver funds are not eligible for this exemption.

MANY INVESTORS BOUGHT AND SOLD GOLD AND SILVER ETFs (EXCHANGE-TRADED FUNDS) ON THE SAME DAY AMID SHARP PRICE SWINGS. WHAT TAX WILL THEY HAVE TO PAY?
Profits from intraday trading of gold or silver ETFs are treated as speculative business income. These are added to your total annual income and taxed as per your applicable income-tax slab rates. Losses from such intraday transactions can be set off only against speculative business profits. For example, if you lost Rs 10,000 in a gold or silver ETF intraday but made Rs 15,000 profit in a stock or ETF intraday, you will pay tax only on the net Rs 5,000. However, if ETF trades were delivery-based, that would not be speculative income—it would be capital gains and cannot be set off against speculative losses.