Silver ETF Taxation in India: A Complete Guide for Investors

Silver has recently crossed the ₹4 lakh per kg mark before falling back to around ₹2.5 lakh per kg. If you are planning to invest in silver, then you can think about investing in Silver ETFs. By investing in a Silver ETF, you gain exposure to this precious metal without worrying about storage, purity, or insurance.

But before you start investing, it’s better to have an understanding of silver ETF taxation. It will help you determine whether a silver ETF suits your long term or short-term investing goals. In this blog, we will know more in detail about the tax on Silver ETF.

What Is a Silver ETF?

A Silver ETF (Exchange Traded Fund) is a financial product that invests in physical silver or silver -related assets. It allows investors to get ownership of silver commodities without any need to hold or store the asset.

The price of the Silver ETF is directly linked to the market price of silver. One can buy or sell the units of Silver ETF on the stock exchange just like you buy stocks. Each unit of an ETF reflects the fixed quantity of silver which is backed by high purity silver (usually 99.9%). They provide transparency, liquidity and lower storage costs as compared to physical silver.

Taxation on Silver ETFs

Those who are planning to invest in Silver ETFs must have a proper understanding of silver ETF taxation.

If the silver ETF is sold within 12 months of purchase, then it is considered a Short-Term Capital Gain (STCG). It is then taxed as per the taxation slab rates.

If the silver ETF is sold after holding for 12 months, then it is considered a Long-Term Capital Gain (LTCG). The taxation rate of 12.50% is applicable. But there is no indexation benefit for STCG and LTCG on silver ETFs with effect from July 23, 2024.

Treatment Before (July 23, 2024)

Under the old tax regime, silver was considered a non-equity asset. If the silver ETF was held for more than 36 months, then it was considered as Long Term Capital gain. This was taxed at 20% with an indexation benefit.

If the silver ETF was sold within 36 months, then it was considered as Short Term Capital Gain and it was taxed as per the income tax slab rate.

How to Calculate Tax on Silver ETFs

Tax on Silver ETF in India depends on the holding period and purchase date. STCG is applied if it is sold within 12 months. However, if it’s sold after 12 months, LTCG applies. Let us understand how this tax is calculated in the Silver ETF.

STCG Tax Calculation

If the Silver ETF is held for less than one year, then gains are equal to sale proceeds minus purchase cost. No indexation is applicable. Now you need to add these gains to your total income. Now, tax will be calculated as per the tax slab rates.

Suppose that you have bought a silver ETF at ₹200 and sold it at ₹250. Now, gains of ₹50/unit will be taxed at the applicable tax slab rate.

LTCG Tax Calculation

If the silver ETF is held for more than 12 months and then sold, then a flat tax rate of 12.50% is applicable. To calculate tax, first deduct the purchase cost from the sale cost of the silver ETF. Now, a 12.5% tax applies to the resulting amount. Let's understand this with an example:-

Suppose that you purchased a silver ETF for ₹ 2,50,000 and sold it after 15 months for ₹3,50,000. As the holding period was more than 12 months, LTCG is applicable. So, 12.5% taxation will be applied on a gain of ₹100,000.

LTCG tax = 12.5% of ₹100,000 = ₹12500.

Tips for Tax-Efficient Investing in Silver ETFs

Silver ETFs give you tax-efficient exposure to silver prices, and that too without worrying about physical storage. But there are certain smart ways to minimise the taxation on Silver ETFs. Let's understand these hacks: -

Hold for Long Term

Aim to hold silver ETFs for the long term, i.e., more than 12 months. This will lead to a flat 12.5% rate. Otherwise, slab rate taxation will be applicable, which in most cases will be higher.

Avoid Frequent Buying and Selling

If you will frequently buy and sell silver ETFs, then it can lead to STCG. In such a case, the income tax applicable will be as per the slab. For the majority of investors, this can result in higher tax liability and reduced net returns.

Plan Your Exit and Maintain Records

You shall plan your exit during a lower income year, which can improve tax efficiency. Moreover, maintain proper records of purchase dates, costs, and holding periods so that tax reporting and compliance are done accurately.

Conclusion

Silver ETFs give you an option to invest in silver without worrying about its purity and storage. But before you invest in silver ETFs, it’s advisable to gain a proper understanding of the silver ETF taxation. The tax treatment of silver ETFs can impact your returns.

Post 23rd July 2024, silver ETFs are now classified as per the 12-month holding rule for taxation purpose. This has simplified the tax calculation and removed indexation benefits.

Sources

Economic Times
Clear Tax
Zerodha Fund House
Taxguru
Economic Times
Economic Times