income tax
As digital investments gain traction among Indian investors, the recent Budget 2023 announcement promises to boost interest in Electronic Gold Receipts (EGRs) by eliminating capital gains taxation on conversions from physical gold.
Indians have a long-standing affinity for gold, often seen as a symbol of wealth and a safeguard against economic uncertainty. With the advent of technology, digital gold has emerged as a compelling investment opportunity.
EGRs resemble stocks and are traded on stock exchanges, providing a modern alternative to holding physical gold stored in vaults. They are maintained in a Demat account and can be acquired through a broker registered with the Securities and Exchange Board of India (SEBI).
Investors can buy or sell EGRs just as they would with shares on the stock market. To convert physical gold to EGRs, one must deposit the gold at a designated delivery center, where a depository receipt will be created for trading.
Although the tax rates on EGR profits remain unclear, the current framework suggests the following:
An alternative perspective indicates that EGRs might attract a 20% tax rate with indexation benefits for assets held over 36 months. If held for a shorter duration, gains may be taxed according to the individual's applicable tax slab.
The Finance Minister's Budget 2023 has clarified that the conversion of physical gold to EGRs will not trigger capital gains tax. Previously, such conversions could be classified as "transfers" under the Income Tax Act (ITA), attracting taxes on capital gains. The amendment has introduced a clause ensuring that these transactions are exempt from taxation.
According to the ITA amendments, when converting physical gold to EGRs, the cost of acquisition will be regarded as the initial cost price of the gold. Moreover, the holding period for calculating capital gains will encompass the duration for which the gold was held prior to the conversion and the period during which the EGR is held.
Consider an investor who purchased 10 grams of physical gold for ₹30,000 in 2013. If this same investor decides to convert the gold into EGRs in 2023, the cost of acquisition for the EGR will still be ₹30,000—the original purchase price. The holding period would include the entire 10 years leading up to the conversion.
The recent amendments by the government aim to simplify capital gains calculations, reinforcing the benefits of indexation for investors. EGRs now present an attractive investment opportunity with reduced risks associated with physical gold—for example, security concerns and quality verification.
With SEBI establishing a comprehensive regulatory framework for gold trading on stock exchanges and the government's supportive measures for digitalization, EGRs are positioned to become a key asset in modern investment portfolios. This shift from traditional methods to digital platforms reflects the evolving investment landscape in India.