How will the 2024 Budget’s gold tax laws affect your finances? Expert analysis

Are you interested in investing in gold or diversifying your portfolio with gold? Then you should be aware of the recent changes related to gold that were announced in yesterday’s budget. In this article, we will delve into these changes and discuss how they could affect your personal finances.

One of the major highlights was the reduction in customs duty on gold from 15% to 6%. Following this announcement, the prices of gold and silver dropped by over 4.0%. This decrease is expected to lower gold prices, potentially boosting domestic demand for the precious metal.

According to Viral Bhatt, the Founder of Money Mantra, when gold prices decrease, demand typically rises. This increased demand could lead to a corresponding uptick in prices, resulting in improved returns on gold investments.

Impact on Sovereign Gold Bond Prices

The price of Sovereign Gold Bonds is influenced by prevailing gold prices, which are in turn affected by customs duty. Experts believe that the cut in customs duty might have implications for the returns from SGBs.

Viral further mentioned that the reduction in customs duty may have a dampening effect on the returns of gold bonds, especially for investors in schemes nearing redemption.

Rahul Agarwal, the Director of IntyGritty MoneyTree, highlighted that the customs duty cut could impact the issue price of new Sovereign Gold Bonds. He emphasized that while short-term SGBs may see a negative impact, the festive season might lead to a resurgence in gold prices, minimizing the impact in the long run.

Impact of Revision in Taxation

Another significant change was the revision in the taxation structure. Let’s delve into the details of these tax modifications.

Physical Gold

Taxation on physical gold investments is categorized into Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG), depending on the holding period. The holding period for physical gold has been reduced to 24 months from 36 months.

Now, if physical gold is sold within 24 months, the gains will be taxed based on the investor’s income tax slab, consistent with the previous system.

However, for sales after 24 months, the gains will be subject to a flat 12.5% tax rate, aligning it with the LTCG tax rates of other asset classes. Previously, investors could benefit from a 20% tax rate with indexation benefits.

Indexation benefits account for inflation’s impact on asset price appreciation, potentially reducing taxable gains and resulting in lower tax liabilities.

Suvankar Sen, the MD & CEO of Senco Gold and Diamonds, pointed out that the simplification of the tax calculation process and the reduction in duties might lead to increased demand for gold, coupled with significant profits over the past few years.

Therefore, the removal of indexation could have minimal effects on long-term gold investors, given the historical appreciation of gold and potential demand boosts from tax revisions.

It’s important for gold investors to consider a systematic investment approach, akin to SIPs, to navigate market fluctuations effectively.

Gold ETFs

Gold ETFs and gold funds now share a 24-month holding period with physical gold. Previously, gains from gold ETFs were taxed as per the income slab.

With the new tax regime, STCG on gold ETFs is taxed at 20%, while LTCG is taxed at 12.5%, making it more tax-efficient for high-tax bracket investors.

This tax adjustment could lead to a more uniform approach to taxation across various asset classes, aiding in better asset allocation strategies.

Absorbing the change in tax rates, ASK Private Wealth noted that overseas FoF and Gold Funds investments could benefit, potentially attracting higher inflows.

Experts believe that these tax revisions could enhance the attractiveness of gold ETFs and funds, especially for investors in higher tax brackets, promoting diversified investment practices.

Varun Asher, the Founder of Optimus Wealth, emphasized that the revised tax structure could drive higher participation in gold ETFs and funds, in addition to escalating demand for Sovereign Gold Bonds.

Gold serves as a valuable hedge against inflation and holds significance as an asset class. Financial professionals recommend allocating around 10% of one’s portfolio to gold, depending on the individual’s risk tolerance.

Investors typically favor asset classes with favorable tax treatment, underscoring the importance of tax considerations in investment decisions.

While equities historically enjoyed tax advantages, the standardization of tax laws could benefit investors in achieving a balanced asset allocation. The alignment of tax laws across asset classes may prompt high-net-worth individuals and high earners to consider gold funds and ETFs for their investment portfolios.

Kartik Sankaran from Fiscal Fitness highlighted the importance of focusing on individual risk profiles and investment horizons rather than solely relying on current tax laws for asset allocation decisions.

The industry has welcomed these tax changes, anticipating potential shifts in investment patterns and behaviors. However, the long-term effects of these revisions remain to be seen, requiring attentive monitoring.

Padmaja Choudhury, a freelance financial content writer, specializes in mutual funds and personal finance, leveraging her six years of experience in the field. Reference – Live Mint