Tax on Gold ETFs vs Gold Mutual Funds

Gold ETFs and Gold Mutual Funds have emerged as a major investment option for investors looking to diversify their portfolio and those not looking for physical gold combined with the recent rise in gold prices. 

Key Highlights

• Gold ETFs held up to 12 months will attract short-term capital gains and will be taxed at applicable slab rates. ETFs held for more than 12 months will LTCG tax at 12.5% without indexation.
• Gold Mutual Funds held up to 24 months will be taxed as STCG at slab rates. Whereas those held for more than 24 months will be taxed as LTCG at 12.5% without indexation. 

What Are Gold ETFs?

Gold ETFs are investment funds that track the price of gold through possession of gold bullions, thus allowing investors to invest in gold electronically without the need to hold physical gold. Gold ETFs trade on stock exchanges and can be bought and sold easily.

What Are Gold Mutual Funds?

Gold Mutual Funds are investment schemes that invest the pooled money in other gold related assets such as Gold ETFs that track the price of gold, thus also acting as an easy means to invest in gold without the need to hold physical gold. 

Tax on Gold ETFs

• Capital gains from Gold ETFs held up to 12 months are classified as short-term capital gains (STCG) and are taxed at applicable slab rates. 
• Capital gains from Gold ETFs held for more than 12 months are classified as long-term capital gains (LTCG) and are taxed at flat 12.5% without indexation. 

Tax on Gold Mutual Funds

• Taxation of capital gains from Gold mutual funds are similar to ETFs with STCG taxed at applicable slab rates and LTCG taxed at 12.5% without indexation. 
• However, gains from Gold mutual funds held for up to 24 months will be classified as STCG and gains from funds held for more than 24 months will be classified as LTCG. 

 Gold ETFs vs Gold Mutual Funds Key Differences

• Gold ETFs do not involve any additional cost and can be bought like any other share listed on the stock exchange. Whereas, Gold Mutual Funds involve various charges such as exit load, expense ratio etc.
• Gold ETFs track the price of gold. Gold Mutual Funds invest the pooled money in other gold related assets. 
• The holding period criteria for Gold ETFs is 12 months and the same in 24 months for Gold Mutual Funds. 
• Gold ETFs offer higher liquidity compared to Gold Mutual Funds as they are actively traded on the stock exchange and provide easy redemption. 

Tax Planning Strategies for Gold Investments

Gold ETFs and Gold Mutual Funds have different working models, taxation rules and additional cost. Understanding these provides investors an edge in their investment decisions and strategies. 

• Investors can focus on saving tax by holding their mutual funds and ETFs for long-term, thus attracting lower tax rates. 
• ETFs come with lower costs as mutual funds have additional costs such as exit load, expense ratios, stamp duty etc.
• Taxpayers falling in the lower tax brackets can focus on short-term investments and can avoid 12.5% flat LTCG.
• Investors can also use the provisions of set-off to adjust their losses with gains and carry forward any additional losses to set off with future gains. 

Gold ETFs & Gold Mutual Funds: Pros and Cons

It is essential to understand the pros and cons of both Gold ETFs and Gold Mutual Funds to be able to determine the better investment option. 

Conclusion

Both Gold ETFs and Gold Mutual Funds offer attractive investment options but is it important to understand both options individually to determine the better option.

Related Articles:
1. Taxation on Silver Investments in ETFs vs Mutual Funds
2. How to Invest in Gold ETF?
3. ETFs vs Mutual Funds – Which is Better for Long Term?
4. Income Tax on Silver Utensils: Taxation, Capital Gains & Saving Strategies