The gold ETFs and debt funds are not taxed in the same manner. There are two categories in which gold ETFs have to be taxed, depending on how long you hold it. If you sell in less than 12 months, then you will be paying short-term capital gains tax in the proportion of your income tax slab. However, if you hold on to it for over 12 months, you bear a flat long-term capital gains tax of 12.5%.
It is quite different from debt funds. Whatever debt fund you bought after March 31, 2023, should be taxed as per your income tax slab rate every time, irrespective of how long you keep it. But if you do choose to invest, there is a tax advantage in investing in gold ETFs, whereby if you’re planning to invest for more than a year, gold ETFs give you a tax advantage.
The good news for investors is that the long-term gain holding period has been reduced from 36 months to 12 months for gold ETFs. But there is a trade off — you no longer receive the indexation benefit that was had previously when the tax rate was 20%.
If you are comparing gold investment options, you should consider them carefully. Physical gold takes 24 months before real long term gains can be made and has extra costs to make charges. The same is applicable for gold mutual funds. However, in the case of Sovereign Gold Bonds, you don’t need to pay tax if you hold them till maturity.
With a special rule, if you sell before 12 months of purchasing, you pay tax on your slab rate, and this works if you buy between April 1, 2023 and March 31, 2025.
Moreover, you need to pay extra tax now because, for short-term trades (less than 12 months), the gain will be taxed at your income tax slab rate. Gold ETFs, however, have become more tax-friendly for holding periods from 1 to 3 years since the shorter holding requirement for long-term gains was adopted.
There is also the point that the 12.5% taxation rate on long-term gains may sound attractive, but losing the indexation benefit may be important, particularly in times of high inflation. If you intend to carry these gold ETFs for the long term, you will have to think about this before making the final decision.