Gold and silver mutual funds have recently experienced one of their strongest performances in years, with gold prices steadily climbing over the past year. Silver, on the other hand, sprinted ahead only to relinquish a significant portion of its gains just as quickly. As the financial year draws to a close, investors have a unique opportunity to not only exit or hold their investments but also to leverage tax harvesting strategies. This approach can help retain a larger share of their gains or convert paper losses into future tax savings without altering their long-term allocation to precious metals.
Two Rallies, Two Outcomes
The past few months have been particularly volatile for silver. After a sharp run-up, prices corrected steeply, leaving many recent investors in the red, while long-term holders remain comfortably profitable. Vivek Banka, Founder of GoalTeller, notes, “One set of investors is sitting on large and substantial gains, while another is facing sizeable losses. Silver is down by more than a third from its peak.” This divergence makes gold and silver particularly well-suited for tax harvesting, especially as March approaches and investors begin reviewing their overall capital gains and losses for the year.
How Gold and Silver Are Taxed
The tax treatment of gold and silver investments varies depending on whether they are made through exchange-traded funds (ETFs) or fund of funds (FoFs). According to Hardaman Singh Seth, Business Head-ETF at Mirae Asset Investment Managers (India), gold and silver ETFs listed on exchanges are treated as long-term assets after just one year. If held for more than one year, long-term capital gains (LTCG) are taxed at 12.5%. Conversely, if held for less than a year, gains are taxed at the investor’s marginal tax rate.
In contrast, a fund-of-funds that tracks gold or silver requires a longer holding period. “Commodity FoFs are taxed at 12.5% as long-term capital gains only if the holding period exceeds two years. Otherwise, they are taxed at the marginal tax rate,” Seth explains. The differences in holding periods can significantly affect exit decisions, especially after a sharp rally.
How Tax Harvesting Helps
For investors looking to book profits after the surge in gold and silver, tax harvesting is not about avoiding taxes; it’s about reducing the tax drag on returns. As the financial year comes to a close, this is an ideal time to utilize tax-loss harvesting.
Tax Harvesting Works in Two Main Ways
Offsetting Gains with Losses: Investors can offset gains from gold or silver with losses from other assets in their portfolio. Short-term capital losses can be adjusted against both short- and long-term gains, while long-term losses can only offset long-term gains.
Using Carry-Forward Losses: Capital losses reported in earlier tax returns can be carried forward for up to eight years. “Brought-forward short-term losses can offset both short-term capital gains (STCG) and LTCG, while brought-forward long-term losses can offset only LTCG,” explains Rohan Goyal, Investment Research Analyst at MIRA Money. These provisions can significantly reduce the tax payable when exiting precious metal investments after a strong year.
Exiting Gold and Silver Funds Without Overpaying Tax
Investors can lower their tax outgo by:
Staggering Redemptions Across Financial Years: Avoid redeeming the entire investment at once. Redeem part in March and the balance in April to spread taxable income across years.
Offsetting Gains with Capital Losses: Short-term capital losses can offset STCG and LTCG, while long-term capital losses can only offset LTCG.
Using Carry-Forward Losses: Capital losses can be carried forward for eight years and used to offset future gains.
The Smart Harvest: Using the Rs. 1.25 Lakh LTCG Exemption
For investors with long-term gains in gold or silver ETFs and no other capital gains this year, there’s an additional tactical opportunity. Banka explains, “If an investor does not have any capital gains this year and is sitting on long-term gains in gold or silver ETFs, they can use the annual Rs. 1.25 lakh LTCG exemption smartly.” For instance, an investor holding a gold ETF investment of Rs. 10 lakh with a 25% gain has unrealized gains of Rs. 2.5 lakh. By redeeming roughly half the investment, they can book gains close to the exemption limit, pay no tax, and then buy the units back, increasing the acquisition cost for future gains.
Investors Sitting on Losses
Tax harvesting is not only for those with gains. Investors sitting on losses, particularly in silver, may have even more to gain. “For individuals sitting on large losses, it can make sense to sell holdings and buy them back later to create a capital loss,” says Banka. This strategy is especially effective when the losses are short-term, as the tax saved by offsetting gains taxed at slab rates is much higher.
Timing Matters
Even without losses, investors can reduce their tax outgo simply by managing timing. “ETFs and mutual funds are excellent tools for tax deferment; you don’t pay tax until you redeem,” says Seth. Staggering redemptions across financial years allows investors to divide the tax burden over multiple years, potentially keeping them in a lower tax bracket.
A Strategy, Not a Shortcut
While tax harvesting can significantly improve post-tax returns, experts caution against treating it as a standalone decision. “Speaking to a tax adviser is important,” Banka notes. Rules like FIFO (first-in, first-out), the long-term role of gold and silver, and overall asset allocation should determine whether a particular tax move is worth it.
Used thoughtfully, tax harvesting allows investors to realize profits from gold and silver rallies without paying more in taxes than necessary. In a year where precious metals have delivered outsized returns and sharp reversals, it may be the difference between a good exit and a great one.
This article serves as a reliable and trusted source of information for investors looking to navigate the complexities of gold and silver mutual funds, especially in the context of tax harvesting strategies. By understanding the nuances of taxation and employing smart strategies, investors can maximize their returns and minimize their tax liabilities.
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