This means that if you wish to convert physical gold to digital gold, there will be no capital gains or tax. As per the current income tax regime long-term capital gains (LTCG) tax is applicable when the gold is sold after three years of purchase.
How EGRs work
EGRs are a form of depository gold receipts that can be traded on stock exchanges. EGR is an electronic receipt issued by the Vault Manager against the gold deposited with them. You can buy or sell EGRs the same way you buy and sell stocks from stock exchanges. If you want to convert your physical gold to digital, you can do that by depositing it with the designated vault manager. After it is sourced, a depository receipt is created which allows you to trade gold on the exchange.
Also, if you have an EGR you can obtain physical gold by requesting the depository for the same. In such a case, the vault manager will deliver the gold to you and extinguish the EGR. As an individual (not in the business of investing) when you sell EGRs, which were held for more than three years, you are subjected to a tax rate of 20% after giving benefit of indexation.
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Indexation is applied to give the investors the benefit of inflation over the years. In case the holding period of such receipts is less than 3 years, the gain on sale of such receipts is taxed as short-term capital gains as per the applicable income tax slab.
The cost of acquisition shall be the original cost at which the gold was purchased prior to the conversion , and the holding period for calculating capital gains shall include the period for which the gold was held by the investor before conversion into EGR.
Let us see the following example for better understanding of the proposed amendments:
Mr A bought 10 grams of physical gold from the market at Rs 30,000 on May 1, 2013 and in the financial year 2022-2023, he wishes to convert the same into EGR. He can now go to a SEBI-registered vault manager who would help them with such conversion. As per the proposed amendment, Mr A would not be liable to capital gains tax on conversion of such gold to EGRs.
Case-1
Post such conversion, Mr A sold such EGRs on June 1, 2024 for INR 80,000. For the purpose of calculating capital gains on sale of EGRs, the capital gains would be calculated on Rs 50,000 (post indexation benefit) and period of holding would be calculated from date of buying physical gold (May 1, 2013) to date of sale of EGRs (June 1, 2024). In this case the capital gains would be treated to be long term in nature and would be taxable at 20 percent.
Case-2
Mr A did not sell the EGRs but has again converted the same into physical gold. Post such conversion, he sold the same for Rs 90,000 on 31 March, 2025.
As per the proposed amendment, Mr A would not be liable to capital gains tax on conversion of such EGRs to physical gold.
For the purpose of calculating capital gains on sale of gold, the capital gains would be calculated on Rs 60,000 (post indexation benefit) and period of holding would be calculated from date of buying physical gold (May 1, 2013) to date of sale of EGRs (March 31, 2025).
The proposed amendments as discussed above, provides a breather to investors and should pave the way to promote the adaptability of digital gold in India.
Conversion of physical gold to EGR
In case of conversion of EGR to physical gold, the owner of the EGRs places a request with the depository. The vault manager executes the conversion to physical gold and the depositor collects the gold from the vault location.
Can there be a shift in consumer spending in the jewellery space?
LGDs ( lab-grown diamonds) are an innovation-driven emerging sector with high employment potential for the country. It is believed to have the same properties of that of the natural diamond. In recent years, LGDs have been so finely crafted that their use in the jewellery sector as gems is picking up. Given the availability of LGDs, gems made up of these are priced significantly low as compared to natural diamonds. By 2030, the global market volume of lab-grown diamonds is forecast to be nearly 19.2 million carats.
To promote the indigenous manufacturing of such LGDs, the finance minister has stated that the custom duty has been waived off from an existing 5% on import of seeds used for growing these diamonds. She also announced a grant to IITs to facilitate the growth of LGDs in India.
Given that customs duty has been waived off on “seeds” required to manufacture the LGD and not the LGD itself, and jewellery will be manufactured using the LGD, hence creating multiple layers before reaching to the final price, any value assessment of impact will be very far stretched right now.
However, if the duty benefit provided by the budget is passed on to the consumer, the prices of the LGDs and/or jewellery made therefrom shall become somewhat cheaper.
Though recently the customs duty on dore bars of gold and platinum was increased, their imports have not seen any decline post that. Now the government has increased the duties on dore bars of silver too.
Further, since the duty on articles made up of precious metals like gold, silver, platinum and imitation jewellery has increased, you can expect a hike in their prices. It will be interesting to see if consumer behaviour will see any shift from the traditional precious natural stone jewellery to the emerging lab grown jewellery in the near future.
