For centuries, gold has been viewed as a household investment and way to build financial security. Experts say investors should look at investing in gold to diversify their risk of return instead of having only-gold portfolios. This is partly because gold doesn’t always offer very high returns.
There are many ways in which you can invest in gold and two of the most popular ones include physical gold and digital gold.
Gold Price In Indian Cities
The price of gold (XAU) today, as of 9:33am, is INR 4,325 per gram of 24-carat gold. That’s down 0.28% on yesterday’s close of INR 4,337.
Compared to last week, Gold is down 1.64%. It’s down 5.89% on one month ago.
The 52-week gold price high is INR 4,591, while the 52-week gold price low is INR 4,351.
The price per gram of 22-carat gold is INR 3,964.
Gold prices vary by city. Check out below to see the price of gold where you live.
How To Invest In Gold Jewelry?
Gold jewelry has traditionally been considered a safe way to invest in gold by Indians, especially in rural areas and small towns, partly due to the lack of awareness or the lack of access to invest via other ways.
If you’re keen on buying gold jewelry, consider the following:
Availability: Almost all jewelers sell gold jewelry in India.
Credibility: You should do your due diligence while choosing the jeweler for your purchase. If you’re buying it as an investment, make sure you buy hallmarked jewelry. This means the purity of gold has been verified under a government process, which will be important if you choose to resell the jewelry.
Cost: The cost of buying jewelry involves the cost of gold and a manufacturing cost that ranges from 5% to 20% over and above the cost of gold. This cost of making the jewelry is a cost that you may not be able to retrieve when you sell your gold jewelry.
Maintenance: When you purchase physical gold, you need to have a safe space to keep it. This might involve locker rental and insurance costs.
The locker rental can vary depending upon your choice of bank. For instance, a safe deposit locker at a well-known private bank ranges anywhere between INR 750 – INR 12,500 depending on the location of the branch, size and the kind of locker that you opt for.
Similarly, insurance cost to protect your gold jewelry also varies from one general insurer to another. For instance, few insurance companies offer protection to jewelry as a part of their home insurance plan and costs associated with it differ depending on the cost of your jewelry and the plan you opt for.
Taxes: You have to pay 3% goods and services tax (GST), at current rates, when purchasing gold jewelry. You won’t be able to recoup this when you resell your jewelry.
You, instead, have to pay a capital gains tax on the profits made from your sale of jewelry. If you sell it within three years of buying it, your gains are taxable as short-term capital gains at normal tax slab applicable to you without any rebate.
If you hold onto your gold jewelry for at least three years, your gains are taxed at a flat 20% rate with the benefit of indexation. Indexation is basically an adjustment to the purchase price of the asset or investment to reflect the effect of inflation, at a rate declared by the Income Tax department.
Be sure to consult your tax advisor to determine what taxes you may owe.
How To Invest In Gold Coins and Gold Bars?
If you intend to add physical gold to your portfolio but don’t want to pay the markup associated with gold jewelry, you can consider gold coins or bullion bars with fine gold content of 22 carat or 24 carat (995 and above).
Here’s what to consider when looking at gold coins and bars:
Availability: Gold coins and bars are available in 22 carat and 24 carat and generally come in tamper-proof packaging. Gold coins are available in different denominations ranging from 1 gram to 50 grams and in different designs. If you are looking for a higher denomination, gold bullion bars are available in 100 grams and 1 kilogram increments.
The Indian government and MMTC sell gold coins known as “India Gold Coin” (IGC). These are Bureau of Indian Standards or BIS-hallmarked , which assures 24 carat purity and 999 fineness.
You can buy gold coins and bars from non-government sources such as jewelers and bullion traders.
Credibility: All coins are generally BIS-hallmarked and before making your purchase, you must ask for a purity certificate from your jeweler or trader. The due-diligence requirement for buying a gold coin or bar is the same as in the case of jewelry.
Cost: The making charges for gold coins range from 2% to 10% over the cost of gold. Manufacturing costs for bars drop to less than 0.5% of the gold cost and even lower for 1 kilogram bars.
Maintenance: The storage cost for both gold coins and bars is at par with gold jewelry.
Taxes: The taxes on your coins and bars are similar to that of gold jewelry. You need to pay 3% GST, at current rates, while purchasing gold coins and bars. This amount is not recoverable when selling your coins or bars.
What Is Digital Gold?
The closest rival to physical gold is digital gold, which is gold purchased via a digital platform that doesn’t require you to hold the investment yourself. Digital gold is available in 24 carat purity.
Availability: You can buy gold for as low as INR 1 and accumulate your purchases over a period.
Digital gold is sold by bullion trading companies and jewelers through their online platforms like mobile apps and websites. Some of the digital gold traders use e-wallets and security brokers to sell digital gold.
Credibility: To add credibility, digital gold traders generally appoint independent trustees and hire reputed third-party vaults to secure the physical gold. The regulatory framework for digital gold providers is not very clear at this time.
Till the time the necessary guidelines to regulate digital gold are notified by the government, you need to carry out your due diligence on the integrity and business model of the digital gold provider. If the trustees are appointed, then their credibility, reputation of the vaulting agency where the gold is stored, and adequacy of insurance needs to be checked.
Therefore, it is necessary to choose the digital gold trader very carefully. Besides the reputation of the trader, you should also be looking at the reputation of trustees and vaults.
Cost: The making charges are payable only when you decide to take delivery of your gold holdings. The making charges are in line with that of coins and bars. However, if you decide to sell your gold without taking the delivery, no making charge is applicable.
Maintenance: Your gold is insured and stored in a secured vault, and can be delivered to you subject to your holdings reaching the minimum deliverable lot, which varies from one digital gold service provider to the other. Some sellers provide delivery at your doorstep.
Once you purchase digital gold, it stays in the custody of a digital gold platform and can be sold either in full or in parts at a nominal transaction cost. To bring more transparency and provide assurance, some of the digital gold platforms also appoint market regulator-registered independent trustees.
Taxes: The taxes are the same as with physical gold, even if your digital gold is never delivered. Taxes are added to your transaction cost.
What Does Buying Gold Digitally Mean?
Digital gold is a method by which you can invest in the yellow metal in small fractions anytime and anywhere with the convenience of digital access to the commodity.
The various forms of investing in digital gold include buying:
Sovereign Gold Bonds (SGBs)
SGBs are debt instruments offered by India’s central banking authority, the Reserve Bank of India (RBI), where investors can purchase gold in a quantity as low as 1 gram. The trade is conducted via investment in a series that the RBI opens for investors for pre-defined periods of time.
SGB series are announced and opened for investors similar to how an initial public offer or public listing of a company is done for a predefined time limit to subscribe to its shares.
Gold Exchange-Traded Funds (ETFs)
Gold ETFs are funds traded on the stock exchanges and are similar to equity mutual funds. Every unit of a gold ETF represents one gram of gold and is of 99.5% purity. This physical gold is stored with depositories and it acts as underlying via which the units of the ETFs derive value. There are various funds that sell gold ETFs and investors have a wide variety to select from.
MCX Gold Contracts
MCX gold contracts provide a method to trade in the metal through India’s recognized commodity exchange—the Multi Commodity Exchange or the MCX. MCX gold contracts are basically derivative futures and options contracts that provide investors with the opportunity to hedge, speculate and trade in the metal for a short-term span. These are suitable for the more experienced investors and are ideally traded under supervision.
Gold is among one of the various metals traded on the MCX. Gold contracts allow the investor to trade in the commodity for a minimum of 1-gram quantity. “Gold”, “gold mini”, “gold guinea” and “gold petal” are some of the quantity-specified products available on the MCX for investors to trade in.
Digital Gold Organizations
Organizations that enable trading gold in a digital format such as Google Pay, PhonePe and Paytm offer a web-platform or a mobile application that supports buying and selling digital gold for an investment amount as low as INR 1. The underlying physical gold is stored with depositories and insured locker facilities maintained by providers such as SafeGold and MMTC-PAMP India. For instance, Google Pay stores its gold with MMTC-PAMP.
Benefits of Investing in Gold Digitally
Purity: When we buy gold digitally, its purity is assured as digital gold is traded in 24-carat form only, which is the highest purity for the metal. This is not the case when investing in physical gold as the possibility of irregularities exist owing to fraudulent practices such as gold plating ornaments to portray the gold to be pure when it actually isn’t.
Safety: The digital form of gold is kept in a demat account making it less prone to any form of theft as opposed to physical gold that carries the risk of being stolen or lost. Storing gold in a demat account is also fairly cheaper than storing physical gold that requires a safe or a vault and invites locker charges as well as insurance cost.
Liquidity: Digital gold can be bought and sold in a fraction of a second, anytime and anywhere. This convenience is not available in the case of physical gold that requires to be bought from reliable sellers who sell government-hallmarked jewelry.
Wear and Tear: Physical gold is a product that can be used in daily life and thus, can be subjected to wear and tear. In the case of digital gold, gold is secure in a digital format and does not undergo any wear and tear.
Government-backed and Transparent: Sovereign Gold Bonds and Gold ETFs are traded on the stock exchanges making them highly transparent to invest in. In the case of Sovereign Gold Bonds, the government offers a sovereign guarantee that makes investing in them risk-free or with minimum risk of a default.
Added Benefit Compared With Bonds: Gold bonds have more benefits as compared to other bonds such as corporate bonds or government bonds as only interest can be earned on the investment made in other bonds. Whereas in gold bonds, the interest along with the gold rate appreciation can be enjoyed. When gold is bought in the digital form, the increment in the gold value along with interest is passed on to the investor.
Downside: Digital gold lacks the emotional touch that a physical gold investment provides to the investor. The attachment attracts investors to gold in traditional communities such as those present in India who perceive buying gold a milestone in their financial planning indicating robust financial health.
Steps to Invest in Gold Digitally
To invest in SGBs and gold ETFs:
- An investor needs to have a demat account linked to their PAN card and their bank account.
- Once the demat account is opened, they can buy select gold products from recognized stock exchanges or directly through the mutual fund for gold ETFs and via the RBI-announced SGB series for SGBs.
- To sell their gold digitally, investors can sell it in the secondary market i.e. the stock exchanges or they can be held till maturity and then redeemed.
- Various organizations also offer the opportunity to buy digital gold starting from INR 1.
- Before buying, know-your-customer (KYC) documents need to be complete and verified. The modes available for demat KYC include e-KYC and video KYC that smoothen and speed up the process of opening an account to buy gold digitally. KYC usually requires the individual’s PAN and Aadhar Card details.
Risks Related To Buying Gold Digitally
- The primary risk that comes along with any investment is that usually the investment value deteriorates yielding negative growth results. Buying gold digitally also carries that risk.
- In the case of gold in the digital form, the regulatory framework to regulate transactions in the metal is not clearly defined in India as yet. This is an important potential risk to be considered. Till the time the necessary guidelines to regulate digital buying and selling of gold are notified by the government, investors need to carry out due diligence on the integrity and business model of the digital gold provider.
- If trustees are appointed by digital gold-providing companies, the credibility and reputation of the vaulting agency where the gold is stored, and the adequacy of insurance need to be evaluated to avoid any risks.
- Hidden charges are another grey area. Before investing into the instrument, cross-check any or all charges involved. Else they will adversely affect the overall returns from the investment.
- Cyber thefts pose a major risk that come along with any online transaction. Buying the digital form of the commodity is also prone to this.
Where Can You Buy Digital Gold in India?
To buy gold in the digital form, various direct options available are:
- SGBs can be bought from the RBI when they announce the series of these bond offerings.
- Gold ETFs can be bought from the mutual funds that offer the product.
- MCX gold contracts are products offered by the MCX and can be purchased from them directly.
- The various products that other organizations offer can be purchased from their websites or mobile applications, which should be KYC-verified.
The indirect option is trading on the secondary market i.e. buying from exchanges such as the Bombay Stock Exchange and the National Stock Exchange that offer a place for buyers and sellers to trade where they act as mediators.
What Makes Investing In Digital Gold Attractive?
Purity: Before hallmarking was made compulsory, the purity of gold was a major concern with buying physical gold, which, as we saw, is completely eliminated in the digital products.
Security and locker charges: Keeping physical gold is a very risky business and storing it in bank lockers adds an additional burden in the form of locker rents, which is not the case in digital gold as it can’t be stolen from our demat accounts and additionally is tradable.
Passive income: Earning an income from physical gold is not possible, instead it requires an outflow of money if kept in lockers, but in SGBs the investors enjoy a passive income in the form of interest.
Making charges: Investors keeping physical gold in jewelry form have to pay at least 8% making charges in addition to the price of gold while buying it, which increases the buying cost leading to reducing their returns, thus investors now tent to buy digital gold which is free from any form of making charges.
Increased awareness: This growing technology has increased the availability of information among general masses. With growing information and knowledge, the investors have now become aware about various forms of investing. Like investors have now started understanding the difference between endowment policies and life insurance, and are now segregating investment from insurance products.
Also with growing efficiency in our capital markets we have seen the transformation from physical shares to demat, combating all the difficulties in investing, similar is the case with gold. Investors have started understanding the difference between investment in gold and buying jewelry for various ornamental uses.
Lower rates on FDs: There was a time when funds kept in FDs would double in five years, but as the rates have slipped way below the inflation levels (i.e. yielding negative real returns), people have started shifting to better safe asset classes.
What Are Sovereign Gold Bonds?
Sovereign gold bonds or SBGs are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The gold in this bond is sold on a per unit basis such that every unit derives its value from underlying one gram gold with 999 purity. The cost is calculated by taking an average of closing prices of gold for the latest three working days preceding the subscription period. These closing prices are published by the India Bullion and Jewellers Association Limited (IBJAL). The redemption price is also calculated on the latest base data from the same source.
SGBs are easy to buy and handle with a term of eight years and an interest rate of 2.5% per annum paid on a half-yearly basis. Every individual purchase is restricted to a maximum of 4kgs per financial year and in case of a trust, it is restricted to 20kgs. The only document mandatory for the purchase of SGBs is a PAN card without which no investment in these bonds is permitted.
How SGBs Work
SGBs are issued by the RBI in different tranches during the financial year. These securities are made available via banks, brokers, post offices and online platforms. A discount of INR 50 per gram is offered to investors who purchase them digitally to promote buying SGBs online.
It is important to note that the RBI brings new series of SGBs for sale in the market throughout the year. So, if you miss the last one announced, you can always wait for the next issue to be announced.
Investors can either buy the bonds in physical, digital or dematerialized format. Once purchased physically, investors can get these bonds credited to their demat accounts by making a specific request for it. RBI then processes the dematerialization at their end and until when, the bonds are held in RBI’s books.
Dematerialization can also be done post allotment. Investors who are not buying directly from the RBI, can buy the units from the secondary market i.e., from stock exchanges.
Benefits of Investing in SGBs
SGB is a good option for investors who wish to buy gold only for the purpose of investment. SGBs ensure the quality of gold is protected and investors are secured against risk.
They are also able to save on the cost of storing physical gold as these bonds are in a digital form and are kept in an investor’s demat account.
The 2.5% interest makes this option attractive because unlike physical gold, investors earn a passive income on their gold, which is directly credited to the bondholders’ accounts.
These bonds make for good market-linked gifts.
The capital gain on the maturity amount of these bonds is completely tax exempt making them attractive for long-term investors.
Risks Involved in Buying SGBs
There is a risk of loss if the market price of gold falls below its cost price. This is not a specific risk with the SGB form of gold investment but is also applicable to the general form of investment.
However, the RBI assures that the investor will never lose in terms of the quantity of gold that was allotted to them.
Things to Know Before Investing in Sovereign Gold Bonds
1. Exit options and the issues involved in it:
The series are issued with a fixed tenor of eight years, although RBI provides an early redemption option after five years from the issue date. Redemption is then allowed on coupon payment dates. This process is very convenient, as investors just need to approach the concerned bank, post office or their agent a month before the coupon payment date. They can also partially redeem their holdings (the minimum quantity being one gram). The redemption amount is then directly credited to the bondholder’s account.
These bonds are also tradable on stock market exchanges, if held in a demat form, and can be bought and sold through demat accounts. But liquidity of the particular series will play a pivotal role in determining the value that bondholders can sell the securities for.
Taxation in the case of SGB is something that needs an investor’s thorough understanding before investing. The Government of India introduced SGBs to facilitate investment in gold. It has a unique tax benefit. Under the SGB scheme, the bond has a maturity of eight years. The capital gain on the maturity amount is completely tax exempt, but any sale before maturity attracts capital gain taxes based on the period of holding.
It is important to note that the tax exemption also applies to bonds purchased from the secondary i.e., stock markets. When you buy SGB from a stock exchange, the transaction is not considered a redemption, but only a transfer and after such transfer, you become the bondholder and receive a tax-free amount upon maturity.
However, if you sell a bond on a stock exchange before it matures, the profit will attract capital gains tax. These short-term benefits will be added to your taxable income and are taxed according to your applicable tax slab.
If the holding period is more than three years, the profit will be treated as long-term capital gain or LTCG. These benefits are taxed at 20% with indexation benefit or 10% without availing the indexation benefits.
The interest on these bonds is at an annual rate of 2.5%. It is paid on a half-yearly basis. No tax deducted at source (TDS) is deducted on this interest amount. It is added to your taxable income and you are taxed according to the applicable tax slab.
3. Usage as collateral:
Another benefit of purchasing SGBs is that they can be used as a collateral against loans. When institutions approve SGBs as collateral, it not only reduces the overall cost of the credit but also works as an incentive for individuals who otherwise buy physical gold with the objective of it working as a support in difficult times.
As the loan-to-value or LTV ratio is the same as is otherwise applicable to ordinary gold loans, investors are less worried about the emergent liquidation of the product. Moreover, the interest income is not withheld by the institution to which the SGB is leaned to, but is transferred to the actual beneficiary just as is the case with loans against fixed deposits.
4. Purchases from the secondary market:
Secondary market purchases have some important focus areas as explained below:
You can buy at a discounted price: SGBs are traded on stock exchanges. However, it is important to note that the secondary market volumes for SGB are very low. Therefore, on account of low demand, the unit price is usually trading at a discount as compared to their market values. In Mumbai, for example, on August 9, 2021, 24K gold was priced at around INR 4,820, while SGB units for the July 2021 series were trading at INR 4,698 on the National Stock Exchange. Thus SGBs usually trade at a discount of 3% to 7% below the prevailing market rate.
You can take the advantage of the discounted rates by understanding and applying the below points:
a. The discounted price can be beneficial for you if you are willing to invest in bonds until maturity. If you try to sell a bond on the stock exchange, you have to sell it at a lower i.e., discounted rate. But, if you remain invested until maturity, you can get the final market price directly from the RBI.
b. Just as we discussed above, the traded volumes are extremely low – only 100-150 units per day. In fact, most bonds do not trade at all. Therefore, if you wish to buy from the secondary market, avoid buying in bulk. This is important because large orders can lead to a sudden price spike. So, consider buying less and accumulating in small quantities across the investment horizon just as we would do for a monthly systematic investment plan.
Check the liquidity before buying: The stock market runs entirely on supply and demand. Therefore, before you buy SGB from the market, evaluate the liquidity of the series you are buying. If the demand for that series is high, you will not be able to get a good discount on it. On the other hand, if you intend to buy your bond and resell it on the stock exchange, then look for a series of bonds with high liquidity.
What Are Gold ETFs?
Gold ETFs are similar to mutual funds that are traded on stock exchanges, i.e., one can buy and sell units from the stock exchanges. Just as an equity mutual fund, where a pool of money is gathered from investors by an asset management company (AMC) to invest in shares, so is the case here, but with pure gold as the underlying.
The AMC allots units to the investors that can be then traded on the exchanges. The price of the ETF correlates with the underlying physical gold, adding the flexibility of equity investment to the age-old simple gold investment.
In basic terms, buying gold ETFs means purchasing gold in the electronic format.
Every unit of a Gold ETF represents one gram of gold and is of 99.5% purity. This physical gold is stored in vaults of custodian banks and works as the underlying from which the units derive value.
This can be understood with this example: suppose the AMC decides to allot the value of 1 gram of gold to each unit, in that case the price of each unit will be approximately the same as the price of 1 gram of gold. There are various investment funds that enable consumers to trade in Gold ETFs. Some of them include Nippon India Gold ETF, Axis Gold ETF, Kotak Gold ETF among others.
Benefits of Investing in Gold ETFs
- No price variation: Gold ETFs are bought and sold at the same rate, which is not the case in case of physical gold. The physical gold market operates at different prices in different geographical locations. Also, the buying and selling rates are different in order to cover the liquidation and other costs that are incurred in the trading of physical gold.
- Purity: When you deal in Gold ETFs, the purity is assured as the sector is organized and 99.5% purity is the standard, whereas the physical gold market lacks the transparency to generate trust in the purity.
- Liquidity: The convenience of selling the product which is listed and traded on recognized stock exchanges can never be matched to transacting in physical gold.
- No fear of theft: Gold being stored in a demat form rescues the investor from the worries that physical gold brings with it. It also helps investors save on locker charges, which are otherwise incurred to keep the physical gold safe.
- No entry and exit load: The investment in Gold ETFs does not charge any entry or exit load as it is traded on the stock exchange.
- No indirect taxation cost: Physical gold attracts indirect taxes such as GST at the rate of 3% on the purchase and sale value. This cost is saved in the ETF transactions as ETFs are securities and securities are specifically excluded from GST.
Risks of Investing in Gold ETFs
- Fluctuation risk: Gold as an investment option has a history of showing exponential growth only when the economy lacks stability. The glitter of the metal is inversely proportional to the economic scenarios. For example, gold hit an all-time high when the world was hit by Covid-19 and now trades at almost 20% less than the highs, when the economy is stabilizing.
- Time limit to trading: Trading on the stock exchanges is restricted to five working days 9:15 am and 3:30 pm, making it difficult to trade in the metal in the exact manner as physical gold, which is available throughout the year at stores selling often between 9am to 9 pm.
- Expense ratio: These are the fees charged by the AMC and are added to the purchase cost to ensure smooth functioning of the fund. The expense ratio includes fees for record retention, payments covering the salaries of the employees and other general allocated expenses. Costs like these are not incurred with physical gold and direct equity investments.
- Lack of options for physical delivery: Investments, with quantities above 1 kg of gold are eligible for physical delivery, which reduces the acceptability of the product among general masses who compare it with the physical form where the quantities traded can be as low as 1 gram.
- Limited volumes of trade: The product being new and not very well known does not see high liquidity on the stock exchanges, reducing the gains earned. This can be understood by the demand and supply logic: if the seller is in need of funds, they will eventually be okay to sell at a lower price in order to fulfill their need. This happens because the buyers want to buy at a lower cost, effectively reducing the profit earned.
- Sentimental value: Gold demand historically, is driven by sentimental value, which gold ETFs fail to justify, and that reduces the acceptability of the product by the general masses.
- Taxation: Gold ETFs are taxed on sale leading to capital gains tax, which is an added liability to the investment. This is not the case when we redeem the other digital gold option i.e. Sovereign gold bonds (redemption on maturity is tax free for SGBs).
Ways to Invest in Gold ETFs
There are two methods of investing in Gold ETFs; one is the direct route and the second is the passive route of investing.
Direct route: Buying units of gold ETFs requires opening a demat account through a stock broker. Post which, just as we purchase shares, units of gold ETFs can be purchased via the stock exchanges directly.
Indirect route: In case one doesn’t want to invest in gold ETFs via the demat option, they can invest into gold funds that indirectly invest in gold ETFs. For example, the HDFC Gold fund that invests in HDFC Gold ETFs. These are called fund of funds. This option is usually preferred by investors for whom mutual fund investment through their app is convenient or better understood.
Gold ETFs Compared With Other Investment Products
Gold ETFs Vs. Physical Gold
Comparing gold ETFs with physical gold is not completely justified as physical gold also serves the jewelry demand in addition to the investment demand.
Physical gold investment has different buying and selling rates, which is not the case with Gold ETFs. But the traditional usage benefits of the commodity has historically outrun the benefits of the digital product.
The comparison of the investment proportion gives the consideration points of indirect taxes, difference in buying and selling rates and also safety and liquidity.
A detailed understanding of the return requirements and purpose of investment is required before investing in any of the two options.
Gold ETFs Vs. SGBs
Sovereign gold bonds (SGB) is a product sold by the Reserve Bank of India (RBI). The sale takes place in a series of close-ended opportunities being presented throughout the year. The product offers 2.5% interest on the actual investment value in addition to the gold value increment of the commodity. In simple terms, SGBs help investors putting their idle gold to earn for them.
As opposed to gold ETFs, the trade volumes of this product is low, which hurts the interests of the investors.
Both products serve as alternate options to the traditional investment method in the yellow metal. SGBs are RBI-backed, adding to trust in the product. Whereas gold ETFs possess higher trading volume compared to SGBs.
Investing in any of the two products need a careful consideration of the average holding period the investor would want to opt for.
Other digital options such as Paytm Gold, provide the physical delivery option which small gold ETFs investments lack.
Gold ETFs Vs. Equity Investment
Long-term equity investments in quality stocks have provided good returns to investors and liquidity and fair pricing of equity investments has been able to attract investors. This is similar to gold ETFs, which provide the same comfort of liquidity and fair pricing to the investor. Thus, the two options work as complements rather than being comparatives.
If you were to choose one of the two, considerations of risk, overall stability in the period of investment, the economic growth prospects in the specific investment sector and the geography should be thoroughly thought over.
Gold ETFs Vs. Debt Investment
Debt investments provide an investor the comfort of promised returns, unless the economic health of the investment is deteriorating. The debt market accordingly ranks the bonds to specify the quality of the underlying asset class.
The bond prices that had seen a sudden sharp fall in the recent pandemic period have now started stabilizing, reducing the bond yields. Thus, just as equities, bonds respond to bad economic scenarios in a negative manner, giving gold the opportunity to hedge the position.
Types of Purity In Gold
Purity is one the most important parameters while buying gold. Gold, by its nature, is a very soft metal and thus while making jewelry, gold has to be mixed with other metals to make it strong to mold it for utility purposes. Over the years, irregularities in purity have reduced but even today, the consumer is not always totally aware of the purity standards of gold and the various aspects related to it. It is this difference in purity parameters that differentiate the hallmark gold from the KDM Gold and 916 Gold.
Here’s what you need to know about purity before buying gold jewelry.
1. KDM Gold
This is a type of gold where 92% pure gold is mixed with 8% Cadmium alloy. Cadmium as a metal has been used since ages to solder the joints in jewelry items.
Cadmium is a poisonous metal and has proven to have caused harm such as skin rashes, itching and also skin cancer upon wearing jewelry made out of KDM Gold. Craftsmen have reported cases of loss of eyesight, cancer and hazardous health conditions.
The government, hence, imposed a complete ban on the use of KDM Gold due to the ill-effects of the Cadmium toxicity. As a result, KDM Gold is not given a hallmark. Even a small proportion of KDM found in gold is sufficient to segregate it from consideration for hallmarking.
2. Hallmark Gold
There are only three types of hallmark gold in India:
- 14K (58.5% Purity)
- 18K (75% Purity)
- 22K (91.6% Purity)
This means that if one is buying 18K gold, 18 out of 24 parts would be pure gold and the rest will be copper and silver in a 50: 50 proportion. Copper is used to provide for the strength it provides for molding the ornament and silver is added in to cover the red texture copper adds to the alloy.
When this is done, a purity concern arises. Copper is less valuable than silver and both silver and copper are less valuable than gold. Identifying the alloy by seeing it is next to impossible, but if the gold looks more reddish then there is a huge probability that the copper content is more, as copper has a reddish color, hence silver is added to make the color look normal. Irregular percentage compositions could potentially be used to gain profit when such mixing is done. Hence, hallmarks are required and used to provide proof that the jewelry is of 14K, 18K or 22K.
Hallmark is the symbol which is marked on the jewelry to know about its purity.
Three hallmarks symbols are commonly used:
a) 22K916 (91.6% Purity)
b) 18K750 (75% Purity)
c) 14K585 (58.5% Purity)
Hallmarked jewelry generally has a purity mark called the Bureau of Indian Standards’ (BIS) mark, the jewel’s mark and the hallmarking center’s mark.
3. 916 Purity
916 Purity is gold that is 22 Karat gold. This is largely used to make gold ornaments as pure as possible and is common for making jewelry in India. About a decade ago, irregularities in 916 Purity were prevalent, a problem that saw resolution with the introduction of strict hallmarking laws and the gold market becoming highly regulated.
The HUID is a new concept introduced by BIS; this is a unique 6-digit code used to mark each gold jewelry item. This code is generated on the BIS portal when complete details of the jewelry are entered on the portal.
With this, BIS wants to ensure that the purity of the jewelry is not misrepresented and additionally since HUID will be unique for every jewelry piece, traceability drastically increases thereby increasing transparency and regulation of the market.
Currently, the HUID Code isn’t mandatory and is being put into active adoption in phases.
To Remember: While buying jewelry, one must be very careful and make sure that all the purity parameter checklist is ticked. Also, jewelry purchase is often more utility-based than a pure investment option. Thus, if the goal is purely investment, one should take into consideration the aspects of costs associated with physical purchases such as making charges and taxes including the goods and services tax on the jewelry items, something that clearly be avoided by investing through digital options like sovereign gold bonds.
What Are Gold Loans And How Do They Work?
A gold loan is a secured loan wherein the borrower keeps their gold, ranging from 18K to 24K, with a bank or a financial institution as security and avails capital against it. On comparative terms, a gold loan can be understood as a similar concept to a “mortgage loan” in which the owner keeps their house or property as mortgage with the bank and takes a loan against it to fulfill their need for capital.
How Do Gold Loans Work?
A gold loan is among banks’ profitable loans as banks are free from the worry of non-performing asset (NPAs). This is because the jewelry which is taken as collateral remains with the bank even if the borrower defaults on the payment of their monthly instalments (EMIs) on their loan.
The way a gold loan works is:
Checking the quality: When a customer approaches a financial institution for a gold loan, the first step the institution takes is to check the purity of the gold jewelry that is being considered as collateral along with determination of value of the jewelry.
Know Your Customer (KYC): Know your customer norms and checks as stated by the Reserve Bank of India (RBI) are performed by the bank, where the bank gets to know their customer’s details such as identity, credit history, the necessity for applying for a loan and other details crucial in granting the loan.
Approval of gold loan: Once the quality and value of jewelry is determined and the KYC procedure is complete, the loan terms are agreed upon by both the financial institution and the consumer. Upon agreement, the loan is approved and the amount is then credited to the borrower’s account. This entire process can be completed within a couple of hours.
Features of a Gold Loan
The interest rates on gold loans vary based on the purity of gold. The higher the purity of gold, the higher the amount that can be availed. Interest rates vary from 8% per annum to 18% per annum in the public sector, whereas in the private sector these rates are ashigh as 24% per annum.
Haircut and loan to value ratio (LTV)
According to the RBI’s guidelines, banks can give a maximum of 90% of the value of gold as loan, implying a minimum 10% as haircut. Generally, the actual loan to value ratio varies from 55% to 65%, which means around a 35% to 45% margin for the banks, making it the safest loan for banks.
Loan to value ratio or LTV ration means the amount a customer will get against the value of gold. For example, if the value of jewelry is INR 10,000 and the LTV is 65%, the maximum loan amount the customer can get would be INR 6,500.
A gold loan is generally a short-to-medium term loan, where the tenure ranges from six months to 24 months. Thus, it is not a long-term loan instrument.
Loan available even to low credit scorers
As the jewelry will be deposited with the bank as collateral against the loan, the bank is confident of sanctioning a loan to the person even with a low credit score.
The weight of stones and their value is not counted
Even though precious stones have high value, they are not considered at the time of calculation for a gold loan. Only the value of gold is taken into consideration for the calculation, thus many a times a digital gold product is preferred against a regular product for the purpose of pledging.
Who Should Opt for a Gold Loan?
Those with short-term fund requirement
Gold loan works as a common working capital loan in businesses fulfilling the short-term requirement for funds. In such scenarios, a gold loan is preferred against a personal loan with adverse interest rates on a comparative basis.
Those with low credit score
As the jewelry acts as a collateral against the loan, the bank is comfortable in advancing a gold loan even to a person with a low credit score.
Those who have gold but are taking a personal loan
People who are considering a personal loan with a short-time duration and have gold lying idle in lockers should consider taking a gold loan instead of a personal loan in order to save up on the interest cost.
Those opting for gold loan from the unorganized sector
Users consider opting a gold loan from unorganized players amid fears of rejection from organized financial institutions that may not provide them a loan because of their credit score history. Such users end up paying hefty interest rates ranging up to 25% to 50% per annum.
Opting for a gold loan from banks and other organized players is a better option since credit history is not a factor that impacts the loan given a gold loan is completely secured. This would help save the interest cost as banks are required to charge interest as per RBI norms, which are market-compliant and not exorbitant.
How to Opt For a Loan Using Digital Gold?
With the introduction of digital gold products, people now have access to a more lucrative option in order to reduce the overall interest burden on gold loans.
You could consider liquidating your physical pure gold (available as “vedhnis”, biscuits, coins and bars) and converting the cash into the digital sovereign gold bonds (SGBs) form. This would help you in two ways: one in securing the funds required and second in earing an interest income of 2.5% annually on the face value even during the loan term, thus reducing the overall cost of credit. For instance, SBI’s interest rate for loan against SGBs is 9.25% but as the underlying is an SGB, the effective cost would be 6.75% per annum.
Tax benefits that are associated with the utilization of the gold loan for specific reasons include:
- Purchasing of a house or improvements thereto: Tax benefits can be availed under Sections 24 (b) and 80C of the Income Tax Act, which allows the exemption of the qualifying portion of interest expense and the principal repayment respectively, effectively reducing the overall cost of credit.
- Business interest cost: Interest expense on gold loan taken for business purposes can be claimed while filing tax returns as a business expense, effectively saving upon your tax liability.
How Gold Is Taxed In India
Tax on Physical Gold
1) Import Duty
A huge portion of India’s gold demand is fulfilled by imports as India doesn’t have as many gold mines to match the huge demand for the commodity. As most of the gold is imported, it attracts Import duty.
Quite recently, the Government of India increased the import duty on gold from 7.5% to 12.5%. Considering this latest figure, let’s take an example: If we are importing INR 1 lakh of gold, at this stage we will have to pay 12.5% as import duty. Hence now the cost of the same gold is INR 1,12,500.
2) Agriculture Infrastructure Development Cess (AIDC)
The AIDC is collected by the Government of India to spend on the development of the nation. 2.5% AIDC is applicable on gold imports. Once the cess is added along with the import duty, the cost of gold would cost INR 1,15,000 if the above example of INR 1 lakh worth of gold is to be considered.
3) Goods and Service Tax (GST)
The GST is applicable on the sale of gold by jewelers or merchants and this cost is passed on to the end consumer. 3% GST is charged on physical gold purchases. Upon import of INR 1 lakh of gold, 3% GST will be charged on INR 1,15,000, which is its value after adding the import duty and cess; that’ll add another INR 3,450 and now the cost to the customer will be INR 1,18,450.
4) Making Charges and GST On It
Making charges do not constitute as tax but a charge is applicable for designing the gold to either coins or jewelry, and hence the making charges attract additional GST. Although the GST cost on this charge might not be presented separately but is included in the making charges column in the final bill when you make a gold purchase.
The GST on making charges is 5% and the making charges vary from 8% to 35% on gold jewelry. Let’s consider a minimum amount of 8% as making charges for the above example of importing INR 1 lakh gold. Upon applying charges of 8%, which is INR 9,200 on INR 1,15,000
and GST on making charges of 5% of INR 460, the total cost you will pay will be INR 1,28,110.
5) Tax Deducted at Source (TDS)
If one buys physical gold of more than INR 1 lakh then they will be charged TDS at 1%. This amount can be utilized in the annual tax liability.
Taxes On Selling Physical Gold
1) Short-term Capital Gains Tax (STCG)
Short-term capital gain is applicable if the gold is sold within three years of purchase. This gain is added to the income of the person and taxed according to the tax slab the person falls in. Thus, if the income falls under the 30% slab, the gain amount i.e., sale price minus the purchase cost will be taxed at 30%.
2) Long-term Capital Gains Tax (LTCG)
Long-term capital gains tax is applicable when the gold is sold after three years of purchase. LTCG on gold gains is 20% with indexation benefit (Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it). This can be waived off if the entire net proceeds from the sale are used to buy government tax benefit bonds like the National Highway Authority of India bonds, REC bonds, among others.
Another way to save taxes is if the net proceeds are used to buy a house either within one year before the sale of gold or within two years of the sale or if the net proceeds are used to build a house within three years of sale of the underlying gold.
3) GST on Exchange of Jewelry
This is a tricky scenario and one must be conscious while transacting in an exchange as the person can be deceived while transacting. When we go to exchange gold jewellery, the transaction doesn’t attract GST if you exchange the same quantity of gold. For example, if one goes to a jeweler with 100 gms of jewelry and exchanges it for a 100 gms of jewelry, no GST is applicable on the gold.
The person would only have to pay for the making charges difference and the applicable taxes on it. Thus, we should be careful of the taxes applied to the bill and ensure that the exchange amount is not taxed.
Tax on Digital Gold
Taxes on digital gold offerings include the following:
Sovereign Gold Bonds (SGBs)
These are bonds issued by the RBI on behalf of the Government of India. One bond represents 1 gram of gold. These are backed by the Government hence are considered very safe.
Taxation on SGBs:
- STCG: If one sells their SGBs within three years of buying, STCG will be applicable. The gains will be added to the income of the person and taxed according to the applicable tax slab.
- LTCG: This is applicable if the bonds are sold at a gain after three years of purchase at 20% with indexation benefits and 10% if indexation benefit is not availed.
No LTCG is applicable if the bond is held till maturity, that means LTCG is exempt. The maturity period for an SGB is eight years.
As these bonds are traded on exchanges one can buy a bond of his choice. Hence, if one wants to invest in gold for a period of three to eight years and doesn’t want to pay tax, SGB is the preferred option.
LTCG is applicable on individuals and not HUFs and Trusts.
- GST: This is not applicable on SGBs as they are treated as securities.
- Making charges and GST on it: As SGBs are digital assets, no making charges are applicable on it and hence no GST on making.
GST is applicable only on the STT and brokerage amount. On a comparative note, these charges are at max, 0.75% of the value of purchases. Hence GST liability is very minimal on SGBs.
- TDS: This is not applicable on SGBs.
- Tax on Interest Amount: Income tax is applicable on the interest earned on SGBs. SGBs offer a 2.5% per annum interest. This interest is added to the income and taxed according to the applicable tax slab. Although this is an additional tax but on a comparative note, SGBs give interest which is not the case in physical gold. Hence, this tax should not be considered as a burden.
Gold Exchange Traded Funds (Gold ETFs)
These are mutual funds, which are traded on stock exchanges in units. Gold ETFs prices represent the value of the underlying gold. These are issued by various mutual fund houses.
Taxation on Gold ETFs:
- STCG and LTCG: STCG is applicable on Gold ETFs similar to that of SGBs, according to the individual’s tax slab. LTCG on Gold ETF is also similar, 20% with indexation benefit and 10% if indexation benefit isn’t available.
- GST: GST is applicable only on the STT and brokerage. GST is also applicable on the expense ratio of the fund. The maximum expense ratio for Gold ETFs in India is 1%. 18% GST is charged on this expense ratio.
- TDS: This is not applicable on Gold ETFs.
Gold ETFs are a preferred option for individuals who want to invest in gold with tax benefits, but have small amounts. Gold ETFs can be bought for a minimum of INR 50 whereas SGBs one has to buy a minimum of one unit, which is equivalent to one gram of gold.