Gold ETFs and Gold Mutual Funds

Investors have traditionally seen gold as a stable investment common for portfolio diversification and capital preservation. Investors can now participate in gold investments digitally, without having to take physical possession of the yellow metal, through financial instruments like ETFs and mutual funds. Since then, market participants have organized gold ETFs and gold mutual funds into a trading platform through which they can capture price movements in gold in regulated financial markets.

Understanding Gold ETFs

A Gold Exchange Traded Fund (ETF) serves as an open-ended mutual fund scheme that invests in physical gold of standard purity, typically 99.5%.Investors trade these ETFs on stock exchanges, and each unit generally represents one gram of gold.Investors must have a Demat and trading account to transact in Gold ETFs. The value of a Gold ETF moves in alignment with domestic gold prices, enabling investors to buy and sell units on the exchange throughout trading hours.

Understanding Gold Mutual Funds

A Gold Mutual Fund is an open-ended fund scheme that primarily invests in units of Gold ETFs or gold-related instruments. Investors do not need a Demat account to invest in Gold Mutual Funds. Investors can buy or sell Gold Mutual Funds directly from asset management companies, and they make trades according to the net asset value (NAV) of the fund at the end of the business day. Many Gold Mutual Funds also offer the facility of Systematic Investment Plans (SIPs) so that investors can invest a fixed amount regularly.

Tax Implications for Gold ETFs

Tax authorities categorize Gold ETFs as non-equity mutual funds due to taxation. The tax rate on such funds depends on the time investors held their investments and not on any gains made.

Short-Term Capital Gains (STCG):

Investors derive short-term capital gains from the sale of units in a Gold ETF within 36 months (3 years) after the purchase. The taxation of these gains is based on the income tax slab rate that an investor pays.

Long-Term Capital Gains (LTCG):

When investors hold their investments for more than 36 months, they classify the gains as long-term capital gains. The tax rate for gains with indexation benefit is 20%. Through the indexation facility, investors can adjust the purchase price of their investments based on inflation, which lowers the amount of taxable capital gain.

Tax Implications for Gold Mutual Funds
Taxation of Gold Mutual Funds is the same as that of a non-equity mutual fund since they classify as Gold ETFs.

Short-Term Capital Gains (STCG):

Investors define short-term capital gains as gains arising from the sale of units in the Gold Mutual Fund within 36 months, and they tax these profits at the income tax slab rate applicable to them.

Long-Term Capital Gains (LTCG):

Investors realize long-term capital gains as a result of holding Gold Mutual Fund units for more than 36 months.

Key Differences in Tax Treatment: Gold ETF vs Gold Mutual Fund
From a tax point of view, both Gold ETFs and Gold Mutual Funds have equal taxation. Both fall under the category of non-equity mutual funds, and the tax authorities tax them equally on their short-term and long-term capital gains.

The working mechanism differs, though. Investors engage in Gold ETFs through a Demat account, and they execute transactions on the stock exchange on market days. Investors can buy and sell Gold Mutual Funds directly from mutual fund houses according to the daily NAV without needing a Demat account.

Conclusion
Exchange Traded Funds and mutual fund schemes that invest in gold provide systematic routes for individuals to gain exposure to gold without owning physical gold. The tax implications of investing in Gold ETFs versus Gold Mutual Funds remain the same as both classify as non-equity mutual funds.