By Col. Rakesh Goyal (Retd)
For many cultures, Diwali is more than just a celebration of lights—it is also a traditional time to purchase gold. Beyond its cultural significance, gold is often considered a safe investment. But the glittering world of gold investments has its own set of tax ramifications.
Nature of Investment
- Physical Gold
Gold Jewellery: Buying gold jewellery is a treasured custom, but keep in mind that you are also paying for craftsmanship when you purchase it in the form of making charges. A 3% Goods and Services Tax (GST) is also applied to the purchase.
Gold Coins/Bars: Choosing gold bars or coins is a simpler way to invest. In comparison to gold jewelry, the making charges are comparatively lower, and the GST is also 3%.
- Gold ETFs (Exchange-Traded Funds)
Gold ETFs are units of mutual funds backed by real gold. They are traded on stock exchanges like shares and represent a fraction of physical gold.
Gold ETFs do not offer an interest component; your returns depend solely on the price movement of gold.
- Gold Bonds (Sovereign Gold Bonds):
Gold Bonds are government-issued securities backed by physical gold.
They are essentially a way to invest in gold in paper form and earn interest on your investment.
Gold Bonds have a fixed tenure, typically 8 years, with an option to exit after the 5th year with certain conditions. The returns are a combination of capital appreciation and periodic interest payments (fixed rate) based on the initial investment.
- Gold Mutual Funds:
You can invest in the gold through mutual funds as well
The Net Asset Value of these gold mutual funds reflects the price movement of physical gold on any business day
Gold Bonds, Gold ETFs (Exchange-Traded Funds), and Gold Mutual Funds are the investment options that allow you to invest in gold, but they have some key differences. Here is a comparison to help you decide which might be more suitable for your investment needs:
Liquidity and Trading:
Physical Gold: Gold can be bought in the form of jewellery, bars or coins from jewellers, financial and non-financial banks, as well as e-commerce websites.
Gold Bonds: Trading Gold Bonds can be less liquid compared to Gold ETFs, as you need to find a buyer for the bond. They are typically listed on stock exchanges and can be bought and sold through brokers.
Gold ETFs: Gold ETFs are highly liquid and can be bought and sold throughout the trading day on stock exchanges, just like regular stocks.
Gold Mutual Funds:
You can invest in the gold mutual funds as we do it for equity and debt mutual funds
Investment is done based on the declared NAV on daily basis
Taxation
Physical Gold: Profits are taxed according to individual slab rates and are classified if they are sold within three years. There is a 20.8% tax (20% + 4% cess) on sales made after three years, with benefits for indexation to take inflation into account.
Gold Bonds: The interest earned on Gold Bonds is taxable as per the income tax laws. However, capital gains tax is exempt if you hold the bond until maturity.
Gold ETFs: Taxation on Gold ETFs is similar to physical gold. Short-term capital gains (if sold within 3 years) are taxed at your applicable income tax rate, while long-term capital gains are taxed at 20% with indexation benefits.
Gold Mutual Funds: Taxation for Gold Mutual Funds is similar to that of Gold ETFs.
Costs
Physical Gold: While gold coins and bars cost only as much as the standard rate of gold, purchasing jewellery can also include high making charges based on the design intricacies.
Gold Bonds: There are no management fees or expense ratios associated with Gold Bonds.
Gold ETFs: Gold ETFs have an expense ratio that covers management fees and other operational expenses. This expense ratio is typically low.
Gold Mutual Funds: Typically, the gold mutual fund would charge an expense ratio of around 1%.
Physical Possession
Physical Gold: There are risks attached to owning physical gold, as you have to ensure safe and secure storage.
Gold Bonds: You don't need to worry about storing physical gold, as the investment is in paper form.
Gold ETFs: You also don't need to store physical gold, but you have indirect ownership of physical gold held by the fund.
Gold Mutual Funds: These can be held either in demat or in electronic format.
Your investment preferences and goals will determine which of these options you choose. Gold Bonds might be a better option if you are looking for an investment that is guaranteed by the government and pays interest. If you prefer the liquidity and simplicity of trading on stock exchanges, gold ETFs and mutual funds may be a better option. It's essential to consider your financial goals, liquidity needs, and tax implications when making a decision.
The writer is a certified financial planner and founder at Lets Invest Wisely.
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