Most Tax Efficient Option for Gold Investment in India (2023)

After the Budget 2023 and the changes announced later, there is a change in the capital gains taxation of non-equity funds. And due to this, fresh investments in gold funds and gold ETFs are no longer as tax-efficient as they were earlier. Now, if the mutual fund holds less than or equal to 35% Indian equities, then the taxation of capital gains will be as per the income tax slab irrespective of the holding period (both LTCG and STCG).

And because of this reason, the Sovereign Gold Bonds (SGB or RBI Gold Bonds) have become the most tax efficient option to invest in gold in India.

Here is a refresher on how SGB taxation works.

Capital Gains Taxation of Sovereign Gold Bonds (2023)

The taxation of Sovereign Gold Bond hence has various aspects.

  • If you buy SGB at the time of new tranche issue and hold till maturity (which is 8 years), then the entire capital gains will be tax-free. This is a special tax benefit that has been offered by the government only to gold bond investors to make the tax bonds more attractive and encourage people to shift from physical gold to non-physical forms of gold.
  • It is allowed to redeem gold bonds from 5th year onwards, i.e., between the 5th and 8th year. Any capital gains arising due to redemption by an individual (only) in this scenario are exempted from tax.
  • SGBs are also allowed to be bought/sold (traded) on the stock exchanges even before the 5th year. Any capital gains arising from the sale of SGB in this case will be taxed based on the holding period. So if you sell the Gold bond on exchange within 3 years, then it will be short-term capital gains taxed as per the tax slab. But if you sell the gold bonds after 3 years but before maturity, then it will be long-term capital gains and taxed at 20% with indexation.
  • The annual SGB interest income of 2.5% is taxable as per the income tax slab rate of the investor. The interest income is added to the total income under the head of ‘Income from Other Sources’ and taxed as per the marginal slab rate accordingly.

So if you are willing to hold gold bonds for a sufficiently long periods (say 5+ years), then your (or an individual investor’s) capital gains are tax-free. And this is what makes gold bonds the most tax-efficient option to invest in gold.

For those who are looking at shorter investment (or trading) horizon for gold, gold ETFs might be better given the better liquidity they offer compared to gold bonds. Do read this comparative analysis on Gold Bonds Vs Gold ETFs to know more, or go through these FAQs on Gold Bond & ETF that I wrote a while back.

Fans of other assets may not agree with me here but there is a solid case for having some exposure to gold in long term portfolio. It can be in the range o 5-15% depending on investor risk profile, time horizon, asset base, unique requirements, etc. Do read more on how to use gold ETFs and Gold Bonds in long term portfolio?

So that was all about why Sovereign Gold Bonds have now become the most tax efficient investment option for investors to invest in gold in India (2023).

Related Reading – Sovereign Gold Price History

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