Ahmedabad: Following Prime Minister Narendra Modi's appeal to refrain from buying gold amid Middle East tensions, the exchange of old gold for new jewellery has gained significant traction among both jewellers and customers. However, tax experts have flagged that a standard gold jewellery exchange can trigger long-term capital gains tax (LTCG) as it is treated as a 'transfer' of a capital asset under the Income-tax Act.
Gold exchange has surged by up to 70% in recent times due to record price rises and jewellers offering lucrative exchange deals. Jewellers acknowledge that LTCG is a contentious subject and are opting for methods to sidestep it. “We stay away from talking about LTCG applicability as it may deter consumers. We take deposits of old gold brought by consumers and give a separate bill of only making charges of the new jewellery with 18% GST. When we take old gold as an advance deposit, the customer does not have to pay LTCG,” said Jigar Patel, treasurer of the Jewellers’ Association Ahmedabad.
Tax consultants advise that consumers can lawfully avoid this tax burden by opting for the 'melt and remake' option instead. Experts note that there is little awareness among customers and even jewellers about this alternative, which can help avoid a sizable tax liability.
Potential Tax Trap for Families
International tax expert Mukesh Patel warned that 'gold ornaments exchange' could be a potential tax trap for many families who bought jewellery years ago at much lower prices. “Gold prices have increased sharply in the last two decades, and a large number of people now opt to acquire new ornaments by exchanging their old gold jewellery. After the PM appealed to people to stop buying new gold, a large number of jewellers have come out with gold exchange offers. But people should understand that exchange of gold jewellery attracts LTCG tax where the asset has been held for 24 months or more, and short-term capital gains tax where the holding period is less than that,” he explained.
Patel illustrated with an example: gold was around Rs 8,000 per 10 grams in 2006 and is now nearing Rs 1.50 lakh per 10 grams. “If someone had acquired gold ornaments weighing 100 grams in 2006, the cost would have been Rs 80,000. The current exchange value of the same would work out to around Rs 15 lakh. In this case, the gain would be calculated at Rs 14.20 lakh and, at 12.5% LTCG plus 4% cess thereon, the effective tax liability would work out to around Rs 1.85 lakh,” he said.
The 'Melt and Remake' Alternative
Chartered accountant Karim Lakhani highlighted the lack of awareness about the 'melt and remake' option. “In a gold exchange or buy-back scheme, there is transfer of gold and therefore it is taxable. Under the gold 'melt and remake' arrangement, one continues to own the gold and there is no transfer. The customer only pays making charges to the jeweller and any additional cost of materials used in the new jewellery,” Lakhani added.
Tax advisers recommend that to avail the benefit of zero tax, customers should clarify with jewellers that the correct nature of the transaction is “melt and remake”. They should also retain documentation relating to additional material costs and labour charges in support of their contention that, since no transfer has taken place, no tax liability arises.
