Monthly Gold Deposit Schemes: Understand Income Tax Rules Before You Invest

Investing in gold has been a cherished tradition in India, often associated with festivals and special occasions. Over time, gold has also become a reliable investment option, symbolizing financial stability and cultural significance. To make gold accessible to the masses, jewellers introduced monthly gold deposit schemes, allowing individuals to systematically save and purchase gold over time. However, while these schemes are attractive, it is crucial to understand the income tax rules applicable before making such an investment.

In this comprehensive guide, we explore the nuances of gold deposit schemes, their benefits, taxation rules, and potential implications for investors.

What are Monthly Gold Deposit Schemes?

Monthly gold deposit schemes are structured saving plans offered by jewellers that allow buyers to purchase gold through small, recurring monthly payments. At the end of the scheme's tenure, participants can redeem their savings to buy gold jewellery, coins, or bars from the jeweller.

These schemes often come with attractive perks such as discounts, bonuses, or even additional instalments paid by the jeweller. For instance:

• Tanishq Golden Harvest Scheme: Customers pay a fixed monthly instalment for 10 months, after which they receive a special discount equivalent to up to 75% of their first instalment.

• Joyalukkas Easy Gold Scheme: Offers benefits like zero or reduced making charges on gold purchases.

• Local Jeweller Schemes: Some jewellers contribute the 13th instalment for customers who complete 12 monthly payments.

These schemes are often compared to Systematic Investment Plans (SIPs) as they encourage disciplined saving for a specific goal—in this case, purchasing gold.

Benefits of Monthly Gold Deposit Schemes

1. Affordable Gold Purchase:

   • By spreading payments over several months, buyers can invest in gold without bearing the full cost upfront.

2. Attractive Perks:

   • Discounts on making charges or additional instalments enhance the value of the purchase.

3. Encourages Savings:

   • Regular payments help individuals cultivate a savings habit.

4. Protection Against Gold Price Fluctuations:

   • Some schemes allow locking in gold prices, shielding investors from market volatility.

5. Cultural Significance:

   • The schemes align with cultural practices, making gold purchases during festivals or special occasions more accessible.

Taxation Rules for Gold Deposit Schemes

While gold deposit schemes offer convenience and savings, the income tax implications can vary depending on the benefits received. Understanding these rules is essential to avoid surprises during tax filings.

1. Discounts on Jewellery Purchases

1. Discounts provided on the price of jewellery or making charges are usually treated as price concessions.

2. Tax Implication: Such discounts are not considered taxable income as they directly reduce the cost of the product.

2. Special Discounts or Bonuses

• When jewellers offer special discounts or bonuses to customers for participating in these schemes, the tax treatment may depend on the nature of the benefit:

  1. If the discount exceeds ₹50,000 in aggregate during a financial year, it may attract taxation under Section 56(2)(x) of the Income Tax Act, which taxes gifts or benefits received without consideration.

  2. However, if the discount is tied to a purchase (e.g., reduced making charges), it is generally not taxable.

3. Cashback or Monetary Benefits

• Monetary benefits, such as cashback received at the end of the scheme, are treated differently:

  • Tax Implication: These benefits are considered "Income from Other Sources" and taxed under the applicable tax slab.

4. 13th Instalment Paid by Jewellers

• In schemes where the jeweller pays the 13th instalment after 12 customer payments, this benefit may not be taxable as it reduces the overall cost of gold rather than providing direct monetary income.

5. SEBI Guidelines and Compliance

• In the past, SEBI issued directives ensuring that jewellery schemes comply with the Companies Act, 2013, as some were considered public deposit schemes. Non-compliance could lead to regulatory action. Investors should ensure the jeweller follows these guidelines to avoid legal complications.

Section 56(2)(x) and its Implications

Section 56(2)(x) of the Income Tax Act governs taxation on gifts and benefits. If the aggregate value of benefits exceeds ₹50,000 in a financial year, it becomes taxable unless:

1. The benefit is directly tied to a purchase.

2. It is not received in the form of cash or a cash-equivalent incentive.

For example:

1. If a jeweller offers a ₹10,000 discount on making charges, this would not typically be taxed as it reduces the cost of jewellery.

2. Conversely, if the jeweller provides ₹10,000 in cashback, it may be taxable.

Contrasting Opinions on Taxability

Tax experts hold differing views on the taxability of discounts and benefits:

1. View 1: Discounts on making charges or price reductions are non-taxable as they lower the cost of acquisition.

2. View 2: Special discounts linked to regular payments in schemes can be considered income and taxed under "Income from Other Sources."

The definition of "income" under the Income Tax Act is broad, ensuring that any new form of income is taxable unless explicitly exempted.

Case Examples of Taxation in Gold Deposit Schemes

Tanishq Golden Harvest Scheme

1. Offers a special discount equivalent to 75% of the first instalment.

2. Tax Implication: If the discount value exceeds ₹50,000 in a financial year, it could potentially attract taxation under Section 56(2)(x).

Joyalukkas Scheme

1. Provides zero or reduced making charges.

2. Tax Implication: Considered a price concession and is unlikely to be taxed.

Local Jewellers with 13th Instalment Benefit

1. The additional instalment acts as a cost reduction.

2. Tax Implication: Generally not taxable, but specifics depend on scheme documentation.

Key Points to Consider Before Investing

1. Understand the Scheme Terms:

   • Read the fine print and clarify the nature of discounts, bonuses, and other benefits.

2. Assess Tax Liability:

   • Consult a tax advisor to understand the tax implications of the benefits received.

3. Check for SEBI Compliance:

   • Ensure the jeweller complies with SEBI regulations to avoid legal risks.

4. Retain Documentation:

   • Keep records of payments, scheme details, and benefits received for tax filing.

5. Evaluate Cost vs. Benefit:

   • Compare the total cost of jewellery purchased through the scheme with direct purchase options.

Alternatives to Gold Deposit Schemes

While gold deposit schemes offer convenience, other investment options in gold include:

1. Sovereign Gold Bonds (SGBs):

   • Issued by the Government of India, offering fixed interest and exemption from capital gains tax on maturity.

2. Gold Exchange-Traded Funds (ETFs):

   • Traded on stock exchanges, offering a hassle-free way to invest in gold.

3. Physical Gold:

   • Traditional purchase of gold coins, bars, or jewellery.

4. Digital Gold:

   • Allows fractional investment in gold through online platforms.

Each option has its own tax implications, liquidity, and storage considerations.

Conclusion

Monthly gold deposit schemes are an attractive option for disciplined savers looking to invest in gold. However, understanding the income tax rules associated with these schemes is essential to make an informed decision. While discounts and cost reductions are generally not taxable, special benefits like cashback or substantial discounts may attract taxation under Section 56(2)(x).

Before investing, ensure you evaluate the scheme's terms, assess tax implications, and explore alternative gold investment options. Consulting a tax advisor can help you navigate the complexities and maximize the benefits of your investment. By doing so, you can make the most of these schemes while staying compliant with tax laws.