In fact, the returns have been better than debt funds as well. But at the same time, investors are also interested in knowing the tax implication of this investment. After all, this factor will determine the actual profits they have made.

Let's look at how gold ETFs are taxed:

GOLD ETFS

Gold ETFs represent a class of mutual fund where the scheme displays the features of both � funds and stocks. Just like a share, the scheme is listed on the stock exchanges. But it has features of a mutual fund too. Its value is dependent on the underlying asset in the form of a net asset value (NAV).

The underlying asset to which the price of the scheme is linked is gold. So there will be a corresponding movement between gold prices and the NAV of the scheme. Due to this, the investor can use the scheme as a proxy for the price of gold and, consequently, undertake investments in gold ETFs to gain from the price changes in gold.

TAX ASPECT

There are a few questions that arise with respect to the tax on these schemes. The prominent one is whether these are considered as equity-oriented or debt-oriented schemes. This can also be the determining factor when it comes to investors' interest in these schemes.

ANALYSIS

Mutual funds are classified into two categories � equity or debt. A scheme is classified as an equity-oriented scheme if it has holdings in the equity of domestic companies, amounting to 65 per cent or more, on an average, during the year. A scheme that does not fulfill this condition is considered as a debt-oriented scheme.

A gold ETF has features that are similar to equity. But when it comes to the actual investment, this is done in gold itself. Since gold is not equity, the scheme is classified as a debt-oriented scheme. The conditions that apply a debt scheme applies to the investors of gold ETF too.

CAPITAL GAINS

There will definitely be a specific tax implication on an investment in a gold ETF, if the investor records gains in the scheme. The first step in understanding the taxation process is to determine the nature of the gains of the investor, which depends on the investment's holding period.

If the holding period is less than 12 months, then the gains will be called short-term capital gains. But if it is more than 12 months, then the gains will be classified as long-term capital gains.

Consider a case where an investor has bought 3,000 gold units at Rs 12.35 each in the month of June 2008 and has sold these in March 2009 at a price of Rs 15.35. In such a situation, the holding period of the investor is less than a year. So this will be termed as a short-term capital gain.

The actual amount of the gain is Rs 3 per unit, or a total of Rs 9,000. If the total taxable income of the individual is, say Rs 6,45,000, then this additional income will be taxed at the normal applicable rate, which will be 30 per cent in this case. In such a situation, it will be a hit for the investor to have short-term gains on their holdings.

Now consider an investor had bought 3,000 units in January 2008 at Rs 11 per unit, and then sold these in March 2009 at Rs 15 per unit. Then there is a long-term capital gain of Rs 12,000 because the holding of the investor is for a period of more than 12 months.

Here, the investor has a choice to tax the gain at 10 per cent without indexation, or at 20 per cent with indexation, whichever is lower.

While gains are taxed, a loss in gold ETF will be available as a set-off too. The only restriction is that a long-term capital loss will be available for a set-off against a long-term capital gain only, while a short-term capital loss can be set off either against a long-term capital gain or a short-term capital gain.

The writer is a certified  financial planner.