Budget 2024: Will the new tax laws on gold impact your personal finances? Experts weigh in

Do you like investing in gold or invest in gold for diversification of your portfolio? Then you need to know about the recent changes concerning gold that came out in yesterday's budget. In this article, we will look into the changes and how they might impact your personal finances.

The first thing that caught everyone's attention was the cut in customs duty from 15% to 6%. After the announcement, gold and silver prices tumbled more than 4.0%. This move is expected to cut gold prices which might prompt domestic demand.

"Typically, when gold prices drop, demand increases. And if demand rises, prices are likely to follow suit. With this dynamic in play, we can expect the returns on gold to go up as well," said Viral Bhatt, Founder, Money Mantra.

Impact on Sovereign Gold Bond Prices

The price of gold for Sovereign Gold Bonds is based on the prevailing gold prices which is also impacted by the customs duty. Experts feel that the decrease in customs duty might impact the returns from SGBs.

"However, the recent cut in customs duty on gold may dampen the gold bonds returns. With the decrease in gold prices, the investors of Sovereign Gold Bond Scheme 2016-17 – Series I which is nearing redemption might also be impacted," said Viral.

Rahul Agarwal, Director, IntyGritty MoneyTree expects the cut in the customs duty will impact the issue price of the new SGB as well. “While the SGBs maturing in the near term might see a negative impact due to the cut. But as we are slowly inching towards festivities, the gold prices might increase as well. There might not be any impact from the long-term perspective,” he said.

Impact of Revision in Taxation

Another main development that took place was the change in the taxation structure. Let us look at both the taxation structure in detail.

Physical Gold

The tax on investments is divided into Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG). It depends on the holding period of the asset class and different asset classes have different holding.

In the case of physical gold, the holding period is now 24 months down from 36 months.

Now, if physical gold is sold within 24 months, the gains will be taxed as per the investor's income tax slab which remains the same as earlier.

But, if it is sold after 24 months, the gains will be taxed at a flat 12.5% which is in line with the tax on LTCG on other asset classes. Earlier, it was 20% with indexation benefits.

Indexation benefits consider the impact of inflation on the increase in the price of an asset. It can lower the taxable gains which can eventually lead to paying less tax on your gains.

“This change simplifies the calculation process and eliminates associated ambiguities. Over the past three years, gold has shown significant appreciation, allowing both fund houses and investors to realise substantial profits. Additionally, we anticipate a 10-12% increase in demand due to the 9% reduction in duties,” Suvankar Sen, MD & CEO, Senco Gold  and  Diamonds.

So, will physical gold investors be better off because of the reduction of the tax and removal of indexation?

There is no right answer to it.

Rahul said that if the gold prices give returns of 10-15%, then the current new tax (without indexation) would be beneficial.

Let us consider a scenario where you received 12% returns on your gold investments. For the sake of simplicity, let us consider that the inflation rate was 6%. So, the real returns will be 5.66%. In this case, you would have to pay 20% on this 5.66% gain. So, your real returns after tax comes to 4.53%.

In the current scenario, a 12.5% tax will be applicable on the entire gains of 12%. The real returns after adjusting for tax and 6% inflation would be 4.25%.

So, the real difference between the two scenarios is 0.29%.

So, for long-term gold investors, the real impact of the removal of indexation might be very minimal.

Suvankar advised gold investors to adopt a systematic investment approach, similar to SIPs, by making regular monthly or yearly investments in gold rather than attempting to time market highs and lows.

Gold ETFs

In the case of gold ETFs and gold funds, the holding period is the same (24 months) as physical gold. However, prior to this budget, the gains from gold ETFs were added to the income and taxed as per the income slab.

Now, the tax on STCG is taxed at 20% and the LTCG tax is at 12.5%.

So, how will this change in taxation impact investors?

A note from ASK Private Wealth mentioned that the investments in overseas FoF and Gold Funds have benefited from the change in tax rates.

In the current scenario, because of the flat rate of 20% and 12.5%, it is now much tax tax-efficient to invest in gold funds and gold ETFs, especially for investors in the higher tax bracket.

Personal finance professionals believe that this has led to a standardisation of taxation among different asset classes and can help in proper asset allocation.

"When the government taxed debt fund gains as per the income slab from Apr'23, they might have unintentionally added gold funds and ETFs into the mix. Now that they've revised the tax structure, it's a welcome move that could lead to higher inflows in gold ETFs and funds. Additionally, the limited issuance of new Sovereign Gold Bonds might also boost demand for these gold investment options going forward," said Varun Asher, Founder, Optimus Wealth.

Gold is considered as a hedge against inflation and it is an important asset class. “Although the requirement of gold in one’s portfolio will depend on the risk tolerance of the investor, a 10% allocation to gold is a decent amount,” said Rahul.

Moreover, it is typically seen that investors tend to be inclined to asset classes that have favourable tax structures.

Imran Gilani of Gilani Wealth says that although the tax laws still favour equity, the standardisation of tax laws will benefit investors with their asset allocation. "Earlier, most DIY investors weren't keen on taking exposure through gold through gold ETFs/funds because of the tax structure. They took exposure to gold through asset allocation funds because of the equity taxation. However, we believe that it might change with the new tax laws and HNIs and high earners might be more open towards considering investments in gold funds/ETFs," said Imran.

However, Kartik Sankaran of Fiscal Fitness believes that current tax laws shouldn't be the primary factor when allocating assets. "Since we have no control over these laws, it's crucial to focus on one's risk profile and investment horizon instead. This ensures a more strategic approach to managing investments," he said.

Overall, the industry has welcomed this move. However, we need to wait and watch to get a sense of the long-term trend because of these revisions.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds, and personal finance are her focus areas.