At a time when Prime Minister Narendra Modi has urged people to avoid buying gold for one year to save India’s foreign exchange reserves, one may consider exchanging old jewellery for redesigned ornaments. However, such exchanges are not a simple swap but a transfer of a capital asset, triggering capital gains tax.
The value attributed to the old jewellery, adjusted against the price of the new ornament, becomes the sale consideration for tax purposes. Any profit — difference between the sale consideration and the original cost of acquisition —is taxable as capital gains. The tax liability will depend on how long the jewellery was held before being exchanged.
Tax on recycled gold
If gold jewellery is sold after being held for more than 24 months, the gains qualify as long-term capital gains and are taxed at 12.5%. However, where the holding period is 24 months or less, the gains are categorised as short-term capital gains and taxed according to the individual’s applicable income tax slab.
Disclose sales in ITR
All jewellery sale transactions should be disclosed in the income tax return. The capital gains must be reported in Schedule CG to mitigate the risk of scrutiny or assessment proceedings by the income tax department, even if the sale proceeds are reinvested in residential property for claiming exemption benefits.
Sandeep Sehgal, partner, Tax, AKM Global, a tax and consulting firm, says jewellers who are liable to get audited are mandated to report cash transactions exceeding Rs 2 lakh under Specified Financial Transaction reporting mechanism. Such transactions are reflected in the Annual Information Statement (AIS). “It is essential that the disclosures made in the ITR are consistent with the information appearing in AIS records,” he says.
Inherited gold jewellery
For inherited gold jewellery acquired before April 1, 2001, taxpayers may adopt the fair market value (FMV) as on that date as the cost of acquisition for capital gains computation.
For undocumented jewellery acquired after 2001, a valuation report from a government-registered valuer is critical, as it provides documentary support in the event of scrutiny, says Neeraj Agarwala, senior partner, Nangia and Co. “The period for which the previous owner held the jewellery is also included while determining whether the gain is short-term or long-term,” he says.
While such a report is reliable evidence, the tax authorities can still question the valuation if it appears excessive or not in line with market realities, so the valuation should be reasonable and well-documented.
Deductions for recycling
A common deduction is wastage charges, which are 5-8% and cover the gold loss that occurs during melting, cleaning, and refining. The making charges paid on purchase are not recoverable when the piece is resold. Stones, enamel, beads, and other non-gold materials are removed before weighing, and only the net gold content is considered for valuation.
Some jewellers may apply additional deductions to account for market risks or price fluctuations, especially if the piece was not purchased from the same brand. “These deductions vary based on the purity, condition of the jewellery, and the jeweller’s policy,” says Mahendra Luniya, chairman, Vighnahrta Gold.
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