On 8 November 2016, when the government introduced demonetisation, people ran helter-skelter not just to exchange currency notes but also to buy gold from the money that was not offered to tax by them. Such acquisition of gold would lead to evasion of tax as a lot of confusion prevailed and also because there is no set limit for possession of gold under the Income Tax Act, 1961 (‘the Act’)
To bring such highly valued transactions within the scope of the Act, the Central Board of Direct Taxes (CBDT), through a press release dated 1 December 2016, offered clarification on the applicability of Income Tax Law and the tax positions regarding quantity limits and conditions for possession of gold jewellery.
Note that the above circular and the limits discussed later are not applicable for any form of gold other than gold jewellery and ornaments.
1.1. Permissible limits for holding gold jewellery and ornaments
CBDT, through a press release, had clarified that there is no limit on holding of gold jewellery or ornaments if acquired from explained sources of income or through inheritance.
1.2. Seizure of gold jewellery and ornaments
The CBDT citing the circular dated 11 May 1994 regarding guidelines in the matter of search and seizure of gold jewellery, further clarified through the press release that the jewellery and ornaments held within the specified limits will not be seized during search proceedings under the Act even if does not match with his tax records. It was further clarified that no proof of investment is required for the gold possessed within the prescribed limits.
The circular mentioned above also provides that the gold jewellery and ornaments need not be seized if :
- The assessee being searched has disclosed such gold jewellery and ornaments in his wealth tax return.
- The assessee is not assessed to wealth tax, then gold jewellery and ornaments up to the prescribed limits above will not be seized.
- The assessee is assessed to wealth tax, then only the excess of the gross weight of gold jewellery and ornaments not declared in the wealth tax return will be seized.
The tax officer conducting the search has discretion not to seize an even higher quantity of gold jewellery provided it is reasonable and justifiable considering family traditions and customs or any other factors.
Therefore, it is always advisable to purchase gold under valid tax invoices and retain those invoices for future reference. In case of gift or inheritance, documents like a gift deed or will or other documents must be obtained and retained as proof of such investment.
On seizure of such gold jewellery and ornaments, the assessee shall be given an opportunity for explaining the source of income for making such investments. If the assessee fails to provide an explanation or the explanation given is not satisfactory, then the same shall be taxable under section 69B at the rate specified in 115BBE of the Act. The rate specified is 60% plus a surcharge of 25% Plus an HEC of 4% and a penalty of 10% on such tax.
The prescribed limit on the quantity of jewellery and ornaments that different persons can hold is as under:
|Particulars||Limit per person|
|Married women||500 gms|
|Unmarried women||250 gms|
The above limits apply only to the family members of the person in respect of whom search proceedings are initiated. If any jewellery belonging to any other person(not being a family member) is found, then the same can be seized by the tax officers.
E.g., Search proceedings are initiated against Mr A under the Act. Gold jewellery and ornaments of around 1500gms have been found. Of which;
- 100gms belonged to his friend and
- 200gms was inherited from his mother, for which a Will was executed.
The family consists of his wife, unmarried daughter and son.
The amount of gold that cannot be seized is computed as under:
|Particulars||Weight of gold (in Gms)|
|Wife (Limit allowed to married women)||500|
|Daughter (Limit allowed to unmarried women)||250|
|Son (Limit allowed to men)||100|
|Mr A (Limit allowed to men)||100|
|Inherited from mother||200|
|Belonging to friend||No limits. Will be seized|
|Total weight of gold that tax officers cannot seize||1150|
Therefore, the gross weight of gold jewellery and ornaments that can be seized is 350 gms, i.e. 1500gms - 1150 gms.
Tax on purchase of gold
2.1. Goods and Service Tax (GST) on purchase of gold
GST is levied at the rate of 3% on the purchase of gold and 5% on making charges.
If you exchange gold (say bars or coins etc.) for new jewellery, then no GST is levied again up to the weight of such gold (bars or coins) exchanged. GST is charged only on the value of excess weight.
However, there shall be no levy of GST on the sale of gold.
2.2. Income Tax on gold jewellery/bullion/Gold ETFs/ Gold MFs received as a gift
If you receive gold jewellery/bullion/Gold ETFs/ Gold MFs as a gift, it shall be taxable for you if the total market value of gold received exceeds INR 50,000. Based on your income bracket, it is taxed under the head ‘Income from other sources’ at slab rates.
However, the Act provides exemptions from tax in some instances:
- If the total value of gifts received by you is up to INR 50,000 in a year
- If the gifts are received from relatives specified below:
- Your/ spouse’s Brother or sister
- Your/ spouse’s lineal ascendant or descendant (e.g. Children, parents, grandparents, etc.)
- Gifts received on the occasion of your marriage from friends or relatives
- Any asset received as inheritance under a will or any law of succession applicable to you
As mentioned earlier, it is advisable to have a gift deed for avoiding scrutiny of tax officers.
If such gold received as a gift is sold, you would be liable to discharge tax on the profits as explained below.
Sale of gold
Tax on sale of gold
Sale of gold jewellery/bullion/Gold ETFs/ Gold MFs is taxable under the head ‘Capital gains’ as under;
- If you sell the gold before the end of three years from purchase, then profit from such a sale is considered short-term capital gain (STCG). The STCG gets added to your income and is taxed based on individual slab rates under the Act.
- If you sell the gold after three years of purchase, then profit from such a sale is considered long-term capital gain (LTCG). The LTCG gets taxed at 20.8% (20% plus a cess of 4%). Indexation benefit of the purchase cost is available (to cover inflation cost from year of purchase to year of sale).
If the gold was acquired by way of gift or inheritance, then purchase cost for computing the profit on the sale of such gold shall be:
|If acquired by the previous owner before 1 April 2001||Fair market value(FMV) as of 1 April 2001 or actual cost of purchase, whichever is more|
|If acquired by the previous owner on or after 1 April 2001||The actual purchase cost|
How to save tax on LTCG arising on sale of gold?
The Act provides tax exemption of the above LTCG to individuals and Hindu Undivided Family (HUF) under section 54F if the entire sale proceeds are invested in acquiring residential house property. To avail exemption, the house property must be purchased either one year before or two years after the date of sale of gold and in case of construction, it must be completed by three years from the date of sale of gold.
Certain other conditions for availing of the exemption are:
- You do not own more than one residential house other than the new one acquired as on date of sale of gold
- You must not purchase or construct more than one new residential house before the time limit mentioned earlier.
- If the new house is sold within three years of its purchase or construction, capital gain on the sale of gold exempted earlier will now become chargeable to tax in the year the new house is sold.
- If the entire proceeds from the sale of gold are not invested in the acquisition of a new residential house, then the proportionate exemption is available, which can be calculated as:
Cost of new house x (LTCG/ Net sale proceeds)
To summarise all the applicable tax laws on purchase, possession or sale of gold;
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