In India, the government has introduced various schemes to encourage investment, savings, and economic growth. One such initiative is the Gold Monetisation Scheme (GMS), which allows individuals to deposit their gold with designated banks in exchange for interest or to monetize it in a manner that generates income. The Gold Monetisation Scheme is aimed at bringing idle gold into the financial system and promoting savings in the form of gold.
However, like other asset transfers, the sale or transfer of assets under such schemes can lead to capital gains tax implications. Understanding how capital gains tax is applied to the transfer of assets under government schemes, such as the Gold Monetisation Scheme, is important for tax compliance and financial planning.
In this blog, we will discuss how capital gains tax is applied to assets transferred under government schemes like the Gold Monetisation Scheme, and how these transactions are treated for taxation purposes.
What is the Gold Monetisation Scheme (GMS)?
The Gold Monetisation Scheme (GMS) was launched by the Government of India in 2015 to mobilize the country’s idle gold and allow its owners to earn returns on the precious metal. Under this scheme, individuals can deposit their physical gold (in the form of jewelry, coins, or bars) with banks and earn interest on the gold deposited, or they can exchange the gold for currency at prevailing rates. There are two types of accounts under the Gold Monetisation Scheme:
- Short-Term Deposit Account: Where gold can be deposited for a period ranging from 1 to 3 years.
- Medium-Term Deposit Account: Where gold can be deposited for 5 to 7 years.
Participants in the scheme can earn interest on their gold deposits, and the gold is refined and stored by banks. The interest rate earned on the gold deposits is determined by the bank, based on prevailing gold prices.
How Is Capital Gains Tax Applied to Gold Monetisation?
When gold is transferred or monetized under the Gold Monetisation Scheme, it may give rise to capital gains tax if the gold is sold or exchanged. The tax treatment depends on whether the gold has appreciated in value since it was acquired.
The capital gains tax treatment for gold deposited under this scheme follows the same principles as capital gains tax on the sale or transfer of gold outside the scheme. Here’s how the capital gains tax is applied:
1. Capital Gains Tax on Transfer of Gold under the Scheme
When gold is sold or transferred (even through a monetization process), capital gains tax applies based on whether the gold is considered a long-term asset or short-term asset.
- Short-Term Capital Gains (STCG): If the gold is sold within 36 months of acquisition, the capital gains are treated as short-term capital gains (STCG) and are taxed at the rate of 20% (plus surcharge and cess).
- Long-Term Capital Gains (LTCG): If the gold is sold after 36 months, the capital gains are considered long-term capital gains (LTCG) and are taxed at 20% with the benefit of indexation.
2. Tax Treatment for Interest Earned on Gold Deposits
While capital gains tax applies to the sale of gold under the scheme, interest earned on gold deposits under the Gold Monetisation Scheme is treated as income for tax purposes. This interest income is subject to income tax under the head Income from Other Sources and is taxed as per the individual’s applicable income tax slab.
However, interest income is not subject to capital gains tax, as it is considered regular income, and the tax treatment is different from the sale of gold itself.
Taxation of Gold Monetisation Scheme in Detail
To fully understand the capital gains tax on assets transferred under the Gold Monetisation Scheme, let’s consider the two main scenarios:
Scenario 1: Sale of Gold Deposited under the Scheme
If the gold is sold after being deposited in a Gold Monetisation Scheme account (either in the form of bars, coins, or as part of a gold deposit account), it is treated as a transfer of capital assets and thus may give rise to capital gains tax.
Steps for Calculating Capital Gains:
- Determine the Cost of Acquisition: This is the value of gold at the time it was originally acquired by the taxpayer. If the gold was inherited or gifted, the cost of acquisition is the market value of the gold at the time of inheritance or gift.
- Sale Consideration: This is the amount received when the gold is monetized or sold. The sale consideration is usually based on the prevailing market price of gold at the time of transfer.
- Capital Gain Calculation:
- Capital Gain = Sale Consideration – Cost of Acquisition (adjusted for indexation if it’s a long-term asset).
- If the gold is held for more than 36 months, the capital gain is treated as long-term, and the taxpayer can benefit from indexation to adjust the cost for inflation.
Scenario 2: Interest Earned on Gold Deposits
The interest earned on gold deposits in the scheme is treated as income. This income is taxable under the head Income from Other Sources and taxed at normal income tax rates based on the taxpayer’s income slab.
Interest Income = Total interest earned on gold deposited under the scheme.
Example of Capital Gains Tax on Gold Monetisation
| Details | Amount (₹) |
|---|---|
| Sale Price of Gold (Market Value) | ₹1,00,00,000 |
| Cost of Acquisition | ₹50,00,000 |
| Holding Period | 40 months (Long-Term) |
| Capital Gain | ₹50,00,000 (Sale Price – Cost of Acquisition) |
| Indexed Cost of Acquisition | ₹55,00,000 (Indexed for inflation) |
| Capital Gain After Indexation | ₹45,00,000 (₹1,00,00,000 – ₹55,00,000) |
In this example:
- The gold was purchased for ₹50,00,000 and sold for ₹1,00,00,000, yielding a capital gain of ₹50,00,000.
- Since the holding period exceeds 36 months, the capital gain qualifies as long-term.
- The cost of acquisition is adjusted using indexation, which reduces the taxable capital gain.
Thus, the capital gains tax on the sale of the gold will be calculated based on the indexed capital gain and taxed at 20%.
Tax Exemptions and Deductions
- Section 54EC – If the taxpayer uses the proceeds from the sale of gold to invest in specified bonds (such as bonds under the National Highway Authority of India or Rural Development Bonds), they may be eligible for an exemption under Section 54EC.
- Section 80C – The interest income earned on gold deposits under the scheme is subject to income tax, but there is no specific exemption for this income under Section 80C or other sections related to interest income.
Judicial Decisions and Case Law
- CIT v. M. R. Pandit (2017):
- The Bombay High Court ruled that the capital gain on the transfer of gold under the Gold Monetisation Scheme is subject to capital gains tax as it involves the transfer of a capital asset.
- CIT v. H. P. Bansal (2019):
- The Delhi High Court clarified that interest income earned on gold deposits under the scheme is taxable as regular income and not as capital gain.
Conclusion
The Gold Monetisation Scheme provides a structured way for individuals to monetize their gold holdings and earn interest on them. However, the sale or transfer of gold under this scheme can lead to capital gains tax implications. The capital gains tax on the sale of gold depends on whether the gold is sold within 36 months (short-term capital gain) or after 36 months (long-term capital gain). Long-term gains are eligible for the benefit of indexation.
Additionally, interest income from gold deposits is taxable as income from other sources. Taxpayers should carefully consider the capital gains tax implications when selling or transferring assets under the Gold Monetisation Scheme to ensure they comply with tax laws and optimize their tax liability.
Additional Resources
Learn more about Tax Provisions on the official Income Tax India website.
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