Union Budget 2024: How New Tax Rules Could Transform Your Gold Investments!

Amid economic uncertainties, retail investors continue to flock to gold as a popular asset class. Gold, a precious metal remains a preferred choice for wealth preservation and diversification. Recent trends indicate sustained interest among retail investors with gold ETFs and digital gold platforms, and it continues to gain prominence.

The 2024 budget reforms have significant implications for gold investments in India. From revised taxation rules to customs duty adjustments, investors are closely monitoring how these changes will affect their portfolios. Let’s delve into the details of the recent changes in Budget 2024 and its impact on Gold investment.

Impact of Customs Duty Cut on Gold and Silver Prices The recent reduction in customs duty from 15% to 6% has led to a decline in gold and silver prices. This drop is expected to stimulate domestic demand. Historically, when gold prices decrease, demand tends to rise, which in turn affects prices. Consequently, it is anticipated that gold returns will also increase.

Sovereign Gold Bond Prices (SGBs) Sovereign Gold Bond prices are influenced by prevailing gold prices, which are impacted by customs duty changes. Experts believe that the decrease in customs duty may affect SGB returns. Investors holding Sovereign Gold Bond Scheme 2016-17 – Series I, which is nearing redemption, could also be impacted. However, from a long-term perspective, the impact may be minimal.

Revised Taxation Impact The holding period for physical gold taxation has been reduced to 24 months (previously 36 months). If gold is sold within 24 months, gains are taxed based on the investor’s income tax slab. However, if sold after 24 months, a flat 12.5% Long-Term Capital Gain Tax (LTCG) applies (replacing the earlier 20% rate with indexation benefits).

Indexation benefits account for inflation’s impact on asset price increases, potentially lowering taxable gains. The removal of indexation simplifies calculations and eliminates ambiguities.

Real Returns Comparison Consider a scenario with 12% returns on gold investments and a 6% inflation rate. Without indexation, the real returns after tax are 4.53%. Under the new 12.5% tax, real returns after adjusting for tax and inflation would be 4.25%. The difference between the two scenarios is 0.29%.

Gold ETFs Gold ETFs and gold funds have a 24-month holding period like physical gold. Previously, gains from gold ETFs were added to income and taxed accordingly. Now, Short-Term Capital Gains (STCG) are taxed at 20%, and LTCG tax is 12.5%. This tax efficiency makes gold funds and ETFs more attractive, especially for higher tax bracket investors.

Standardized taxation across asset classes aids proper asset allocation. While gold serves as an inflation hedge, its portfolio allocation depends on investor risk tolerance. The removal of indexation may minimally impact long-term gold investors.

Many experts believe that retail Investors will increasingly consider investment in gold funds and Gold ETFs due to the favorable changes in tax structures, and move away from equity-based exposure taken earlier through asset allocation funds.

Source: Mint