Gold ETFs and Gold mutual funds may lose out to the new Gold EGRs on tax front

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The Securities and Exchange Board of India (Sebi) announced a framework for Electronic Gold Receipts (EGRs) in India today. According to Sebi rules, EGRs will be issued in lieu of physical gold stored in registered vaults. Furthermore EGRs can be traded on existing stock exchanges and will be considered as securities under Securities Contracts (Regulation) Act, 1956. A previous consultation paper issued by Sebi further posited that EGRs should be subject to Securities Transaction Tax (STT). According to some tax experts, this may allow EGRs to qualify for the favourable Long Term Capital Gains (LTCG) tax after a 1 year holding period. This compares favourably with Gold ETFs and Gold fund of funds (FoFs) which qualify for LTCG after 3 years.

“Section 112 of the Income Tax Act, 1961 has a rate of 10% for listed securities. However Gold ETFs being units are excluded and a 20% LTCG tax rate with indexation applies to gold ETFs. EGRs not being units, but being listed, will qualify both for the 1 year as well as 10% LTCG rate unike ETFs which lose out on both fronts,” said Gautam Nayak, Partner, CNK and Associates LLP.  “Capital Gains in listed Gold EGRs will qualify as long term if the EGR is held for more than 12 months, as with any other listed security. However the LTCG rate on them will be 20% along with the benefit of indexation or 10% without indexing the cost whichever is more beneficial to the investor”,” said Ameet Patel, Partner, Manohar Chowhary and Associates and Past President of Bombay Chartered Accountants’ Society (known as BCAS). 

Prakash Hegde, a Bengaluru based Chartered Accountant took a more cautious approach. He asked assessees to proceed cautiously and assume a 36 month holding period until there is more clarity from the Government. “If Electronic Gold Receipts or EGRs are notified by the Central Government as securities then the holding period for levy of Long Term Capital Gains will be 12 months since they would be listed securities on recognized stock exchanges,” he added. 

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