Gold schemes: Taxation of income attractive

Chennai : While tax treatment of income earned from the three new gold schemes launched by Prime Minister Narendra Modi on Thursday is attractive, the treatment of the investors by taxmen is certainly a worrisome factor. "The tax system is conducive for people to invest in newly launched Gold Monetisation Scheme (GMS).

The interest earned on the deposits is tax-free. Even the capital gains that arise from trading or redemption of these deposits are exempt from tax," Neha Malhotra, manager at Nangia & Co, an international tax advisory firm, told IANS. The interest rate in the medium term deposits (5-7 years) has been fixed at 2.25 per cent and for the long-term deposits (12-15 years) is 2.5 per cent for the bonds issued in 2015-16.

The interest on short-term deposits (1-3 years) will be determined by the banks. "An individual faces tension in bringing in their gold to a GMS due to the fear of investigation by tax authorities after subscription to the scheme," Malhotra said. "The depositor needs to fill the 'Know Your Customer' (KYC) form for deposit of gold and it shall be ensured that the scheme does not serve as a safe harbour for tax evaders, black money hoarders and others," she added.

In India, gold jewellery is handed down by parents/grandparents to their children/grandchildren. Jewellery is also purchased in shops without bills to avoid sales tax. "Even when a person purchases gold/jewellery paying sales tax, (s)he may not be preserving the bills for long," Malhotra said.

Modi also launched Gold Sovereign Bond Scheme and Gold Coin/Bullion Scheme. Putting money in Gold Sovereign Bond is an indirect way of investing in the yellow metal. "The interest on Gold Sovereign Bonds shall be taxable as per the provision of the Income Tax Act and the capital gains tax shall also remain same as in the case of physical gold," Malhotra said. The rate of interest will be 2.75 per cent per annum payable half yearly on the initial value of investment.

Where the gold bonds are sold before holding for three years, then the gains would be short-term and shall be added to the income and taxed as per the slab rate. "However where the bonds are sold after three years of holding, then the gains would be long-term and flat rate of 20 per cent with indexation benefits would apply," Malhotra said.

She said the government has agreed to ensure tax neutrality between the purchase of physical gold and investment in the gold bonds. "This will require amendments in the existing provisions of the Income Tax Act, which will be considered in the 2016-17 union budget," she said.

According to her, there is no difference in tax treatment between investments made in gold bonds and that of gold exchange traded funds. The maximum amount subscribed by an entity will not be more than 500 gm per person for a fiscal year (April-March). A self-declaration to this effect will be obtained.

A mechanism will be put in place for internal verification of the self declarations. Gold coins being physical gold shall face the same tax treatment as is accorded to physical gold in India. Accordingly, the gains arising on sale thereof shall be taxable as capital gains depending upon its period of holding. Jewellers are not worried about the competition from the government-issued gold coins.

"People may not buy coins as an investment as the price of coin is higher than what jewellers sell. People may buy the government-issued gold coins as a matter of pride," N Anantha Padmanabhan, managing director, NAC Jewellers, said. According to him, the GMS under the existing set-up may bring out only about 20 tonnes of gold. "If BIS certified jewellers are allowed to accept the gold, then around 100 tonnes of gold may be mobilised," he added.

By Venkatachari Jagannathan