Buying gold around Diwali tops the shopping list for a large number of Indians. It is considered auspicious to buy gold on Dhanteras and Akshaya Tritiya. Gold can be bought in different forms: In physical form such as jewellery and coins; Or digital form through mobile wallets; Or in paper form by investing in gold mutual funds, gold exchange-traded funds (ETFs) and sovereign gold bonds (SGB).

While buying gold in any of these forms it is important to know how it is taxed at the time of buying and selling.

Physical gold
The most common way of buying gold is in the form of jewellery, coins and gold bars. However, most of us are clueless about how these are taxed when we sell or exchange them for jewellery with a different design.

According to current income tax laws, the taxation of this form of gold depends on how long you have held the gold jewellery/coins. The capital gains arising from the sale of gold will be short-term or long-term depending on the time period for which the gold has been held.

The capital gains on sale of this form of gold will be classified as short-term if the difference between the date of buying and selling is less than three years (36 months). Such short-term capital gains will be added to your gross total income and taxed at the income tax rates applicable to your income slab.

If the difference between date of buying and selling exceeds the period of three years (36 months), then the capital gains are classified as long-term. These gains are taxed at 20 per cent along with surcharge, if any, plus cess at 4 per cent with the indexation benefit.

Also, one should remember that you will be charged Goods and Service Tax (GST) at the time of buying. The GST is charged at 3 per cent on the value of gold plus making charges.

Paper gold
Another way of buying gold is by investing in gold mutual funds, gold ETFs and/or SGBs. Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, "The taxation of gold mutual funds and gold ETFs at the time of redemption is same as selling gold jewellery." If the timeperiod between the date of investment and date of redemption is less than three years, then capital gains will be classified as short-term, added to the person's gross income, and taxed accordingly. On the other hand, if the time period exceeds three years, then these gains will be treated as long-term and taxed at 20 per cent plus cess with indexation benefit.

Taxation of returns from SGBs is different. SGBs earn an interest of 2.5 per cent per annum. Wadhwa says, "Interest earned from these bonds will be taxable under the head Income from other sources and taxed at the rates applicable to your income."

The maturity amount that you will receive after 8 years is linked to the gold prices prevailing at that time in the market. In the case of SGBs if any capital gains arise at the time of maturity, then those will be exempted from tax. However, as an investor, you have an option to exit from the scheme post the expiry of lock-in period after five years.

"If you exit from the scheme after five years, any capital gains arising from such a sale will be taxed as long-term capital gains at 20 per cent with indexation. However, TDS provisions will not be applicable at the time of maturity or sale of the bonds," says Wadhwa.

Digital gold
Digital gold is the latest way to accumulate gold. Many mobile wallets such as Paytm, Mobikwik, and PhonePe have tied up with MMTC-PAMP or SafeGold to sell gold, starting from a minimum value of Re 1, to its customers.

Buying and selling of gold is easy on these platforms as gold bought is kept in digital form. The taxation of digital gold is also the same as that of physical gold where the classification of capital gains, if any, will be dependent on the holding period, says Wadhwa.