Selling Gold Or Silver ETFs? The Rs 1.25 Lakh LTCG Break Will Not Help

Investors thinking of booking profits in gold or silver exchange-traded funds (ETFs) should be prepared for a higher tax outgo, as the Rs 1.25 lakh long-term capital gains (LTCG) exemption available on equities does not apply to these instruments, according to a recent report by Moneycontrol.

The distinction is important at a time when gold prices remain elevated, and silver has also seen sharp swings, prompting many investors to consider partial redemptions. While these ETFs trade on stock exchanges just like shares, their tax treatment is fundamentally different.

Different Category, Different Tax Rule

The Rs 1.25 lakh LTCG exemption is available under Section 112A of the Income Tax Act for listed equity shares and equity-oriented mutual funds. Under this provision, long-term gains up to Rs 1.25 lakh in a financial year are exempt, and gains beyond that are taxed at 12.5 per cent.

Gold and silver ETFs do not fall under this category. For tax purposes, they are treated as non-equity assets. As a result, the special exemption that equity investors can use each year is not available to those investing in precious metal ETFs.

This means that if you sell gold or silver ETF units after holding them for more than 12 months, the entire long-term gain will be taxable. There is no tax-free threshold of Rs 1.25 lakh that can be deducted before calculating tax.

What You Will Actually Pay

The holding period determines how gains are taxed.

If ETF units are sold within 12 months of purchase, the gains are classified as short-term capital gains. These are added to your total income and taxed according to your applicable income tax slab.

When you sell the units after holding them for over a year, the profit is treated as a long-term capital gain. That amount is taxed at 12.5 percent, and you cannot claim indexation to adjust the purchase cost. Unlike equity investments, there is no annual exemption of Rs 1.25 lakh available.

To illustrate, suppose an investor makes a long-term gain of Rs 2 lakh from selling gold ETF units. The full Rs 2 lakh will be subject to 12.5 per cent tax. If the same gain had come from listed shares, only the amount above Rs 1.25 lakh would have been taxable.

Points To Keep In Mind

Before going ahead with a sale, investors would do well to work out the full tax impact. Any capital losses booked elsewhere in the portfolio during the year can be adjusted against such gains, in line with the rules in force, to bring down the overall liability.

It may also help to check whether you have any unadjusted capital losses from earlier years, as these can be used, subject to the rules, to offset taxable gains in the current financial year.

Many investors use gold and silver ETFs to spread risk and cushion their portfolios during uncertain market phases. But from a tax standpoint, they are not on par with equities. Knowing this in advance can prevent last-minute shocks when you sit down to file your return.