The golden rule

Adhil Shetty shows the smart ways of investing in gold

By Adhil Shetty
  • Published 22.10.18, 2:13 AM
  • Updated 16.11.18, 1:21 PM
  • 4 mins read
  •  
Today, gold can be bought in two different ways. One is obviously the traditional physical gold: through coins, bars, jewellery etc. However, if you’re looking to invest in gold, you can buy its dematerialised form as well. You have the sovereign gold bonds (SGBs), gold ETFs and gold mutual funds. (Agencies)

We are in the festival and wedding season now. Buying gold is common to both events. Indians have for centuries trusted gold — not just as a statement of fashion but also as a way to create wealth.

Today, gold can be bought in two different ways. One is obviously the traditional physical gold: through coins, bars, jewellery etc. However, if you’re looking to invest in gold, you can buy its dematerialised form as well. You have the sovereign gold bonds (SGBs), gold ETFs and gold mutual funds. Let’s take a look at the various options, starting with physical gold, and how the pricing dynamics have changed since the arrival of the GST.

GST constraint

Earlier, gold buyers were required to furnish PAN while buying gold worth more than Rs 50,000. Recently, the government has increased the cap to Rs 2 lakh. If you like to invest in gold, you should know the tax implications.

Under the GST, physical gold is taxed at 3 per cent whereas if you invest in SGB or gold ETFs,there’s no GST. If you are buying gold jewellery, the making charge on such products will be levied with 18 per cent GST. The taxation naturally makes gold unattractive from an investment point of view, especially when you consider how gold prices have been stagnant for the best part of the 2010.

When you sell gold, your gains are clubbed with your income and taxed. For gold owned for less than three years, the gains are taxed for short-term capital gains (STCG) according to your slab. For gold owned longer, your gains are taxed for long-term capital gains (LTCG) at 20.6 per cent with indexation benefit, where your purchase price is adjusted for inflation.

You can save LTCG tax by reinvesting your gains in a residential property under Section 54 of the income tax act, or by investing this under Section 54EC in eligible bonds such as the REC or NHAI bond.

Electronic options

As an investor, you can simply buy, hold, and sell gold electronically. This will save you from three main problems. One, you don’t have to worry about the purity of the metal you’re buying since it is in electronic form. Two, you don’t have to worry about its safe storage nor do you need to spend towards locker rent as your gold is stored electronically in your demat account. Three, you don’t have to pay GST on purchase or making charges. The following are the three main demat gold options today.

Sovereign gold bond: Earlier this year in April, the new tranche of the sovereign gold bond (SGB) was launched and the price was linked to the prevalent gold prices.There was also a discount of Rs 50 for applications made online and paid digitally. The second tranche is expected this year around Diwali. The sovereign rating of the bond makes it a safe investment, and one of its objectives is to reduce the physical ownership of gold.

Eligible individual investors (who need to be resident Indians) and HUFs can now invest between one gram and four kilos, with the cap being raised from the earlier 500 grams. However, institutions and trusts can invest up to 20 kilos.

One of the biggest advantages of investing in gold via SGB is earning an interest income along with capital gains linked to appreciation of gold. The interest income has been fixed at 2.50 per cent compounding semi-annually. This makes SGB a more attractive investment than physical gold, which earns you no interest income.

However, SGB is a long-term investment with an eight-year tenure. Partial withdrawals are allowed from the fifth year. The returns are tax-free after the full tenure. Premature withdrawals will attract short-term capital gains tax according to your tax slab. To buy SGB, you can apply at the authorised banks, stock exchanges, investment agents, post offices and trading accounts.

Gold ETFs: Exchange-traded funds are mutual funds that can be bought and sold on the stock markets. For gold ETFs, the underlying asset is high-quality gold. ETFs are without entry and exit loads. You can start buying them by opening an online trading account and buying from quantities of a gram or more. There are no limits to how much you can buy nor is there a lock-in. You can buy and sell ETF as you please. Your capital gains are linked to the real-time prices of gold. Brokerage charges may apply.

Gold ETF investments are treated similar to debt mutual funds. Units held for three years or more qualify for Long Term Capital Gains tax at 20.6 per cent with indexation benefits. Units held for less than three years qualify for short-term capital gains tax.

Gold mutual funds: A major advantage of mutual funds is that you can start investing with sums as small as Rs 500 a month. The price of gold today hovers around Rs 3000, and you need to buy gold in grams. However, a mutual fund investment allows you to buy gold with even Rs 500. A mutual fund investment can be entered into or exited easily. To buy gold mutual fund (or any mutual fund), you need to register an account with an asset management company or a fund distributor. You can apply for a direct plan (as opposed to a regular plan) and enjoy a lower expense ratio and, therefore, higher returns.

Returns watch

Gold has offered moderate returns in the recent past. There have been periods of high growth between 2004 and 2012. Since 2012, the prices have stabilised. At present, 24-carat gold is trading in the range of Rs 30,000 for 10 grams in various Indian cities.

For buyers looking for physical gold, these concerns may not hold. But investors looking for an above-average rate of growth are advised to select gold only in limited quantities.

They can invest in a mix of equity, real estate, mutual funds, PPF and gold. This would help them to diversify their portfolio and create earning streams for various avenues.

The writer is CEO of BankBazaar