Simultaneously, the LTCG tax rate on gold has been cut from 20% to a flat 12.5%.
However, the benefit of indexation, which allowed taxpayers to adjust the purchase price of gold for inflation, has been removed.
Understanding the changes
Previous rules
Under the previous rules, individuals who held gold for more than 36 months could sell it and the resulting gains would be classified as long-term.
These gains were then taxed at 20%, with the benefit of indexation.
Indexation allowed sellers to adjust the purchase price of their gold by accounting for inflation, effectively reducing the taxable capital gains amount.
New rules
With the new budget provisions, gold sold after 24 months will qualify for long-term capital gains treatment and will be taxed at a lower rate of 12.5%, but without the benefit of indexation.
This means that taxpayers will calculate their gains based on the original purchase price, without any adjustment for inflation.
Short-term capital gains, which apply to gold sold within 24 months, will continue to be taxed at the applicable income tax slab rate.
Implications of the new rules
These amendments simplify the taxation process for gold investors by reducing the holding period and tax rate for long-term capital gains while removing the complex indexation calculation.
Investors must now weigh the benefits of a lower tax rate against the removal of indexation when considering the sale of their gold assets.
Finance Secretary TV Somanathan clarified that the reduction in long-term capital gains (LTCG) tax to 12.5% without indexation should not be viewed as a major setback.
According to him, the impact is not as severe as some investors may perceive.
He noted that inflation, averaging 4.5%, is fairly predictable, and the tax incidence under the new system could actually be lower for many investors.
Moreover, the indexation benefit remains applicable for assets purchased up to 2001, with the property’s value being considered from either the purchase date or 2001, whichever is more advantageous for tax purposes.
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