Investment in gold offers exponential returns.

For instance, a sovereign of gold bought for Rs 18,720 in 2015 could be sold for Rs 45,320 now,resulting in a gain of Rs 26,600. In short, apart from the pride and satisfaction of owning gold, one can make a profit of over 240 % in eight years.

Cashing in on this investment opportunity, several people sell gold which is in their possession for a profit, which attracts tax. However, deductions could be obtained on this tax by utilizing the money obtained by selling gold to invest in tax-free bonds, for house construction or to buy a house.

Capital gains tax

Profit earned from selling any capital asset, including gold, attracts capital gains tax. When gold is sold within three years of purchase, the income would be considered as short-term capital gain. In this case, the difference between the selling price and purchase price would be added to the total taxable income and the Income Tax should be paid according to the slab for this amount.

But, if the gold is sold after three years, long-term capital gains tax would be effective and the rate is 20%. At the same time, indexation benefit could be applied here as the inflation rate too would be taken into account while fixing the purchase price.

How to avoid capital gains tax

The tax need not be paid if the amount received by selling gold is spent to construct or buy a house. But, the house should be purchased within one or two years. Similarly, the tax will not be applied if the house construction is completed within three years.

The tax can also be deducted from the income by investing in tax-free bonds of the government such as National Highway Authority of India Bond and REC Bond.