Gold is a highly liquid investment option in India, this is why many investors are keen on adding precious metals to their portfolios to achieve diversification. The fact today gold is available in so many different forms makes it easier for individuals to expose their portfolio to it based on their traits and profitability.
That said, let us take a quick look at this article below to understand more about gold investment in India.
Why should you park money into gold?
Besides liquidity, counted among potent hedge options that not only cushions volatility involved with equity investment but offers inflation-adjusted returns in the long run. Additionally, the fact gold has continuously offered good returns for the past 40 years makes it further lucrative for investors.
Types of Gold Investment in India
Individuals have the option to park money into gold either in its physical form or digital form. Investors can hold physical gold in the form of bullion, bars, coins, or jewelry. However, one should note that investment in physical gold is plagued with several limitations.
For instance, the making and designing charges of gold make its purchase expensive. Additionally, storing gold is also costly owing to the components of insurance and security. Even the impurities in gold and certificate of purity and origin also affect the process of selling gold.
Individuals can avoid these limitations, by simply investing their money into digital gold, sovereign gold bonds, gold ETFs, and gold mutual funds.
Essentially, digital gold can be bought through different apps in denominations starting at 1gm.
Here’s a brief introduction to the popular digital options for gold investment in India –
Gold Exchange Traded Funds (Gold ETF)
Gold ETFs are traded on the stock exchange the same as shares. They feature physical gold and the stock of refining and mining as the underlying asset. Notably, investors must have a Demat account to invest in Gold ETFs.
Gold Mutual Funds
Typically, gold mutual funds are handled by asset management companies following a fund of fund structure. Such AMCs mostly invest in gold ETFs.
Individuals can use an investment calculator to ascertain the estimated returns from each gold option. Subsequently, they should identify which gold investment option will prove the most useful in diversifying their portfolio and helping to meet set goals.
Sovereign Gold Bonds
The Reserve Bank of India releases sovereign gold bonds at regular intervals and makes them available to investors through private and public sector banks.
Notably, the returns on sovereign gold bonds are linked to the price of gold and the earnings are guaranteed by the government. However, it should be noted that these bonds do not have any physical gold as the underlying asset.
All the gold investments in India are linked directly to the price of gold. Since the gold rate in India tends to fluctuate, it affects the price of the precious metals and investment options linked to it. However, there are significant differences between each of the gold options in terms of risks, returns, tax treatment, and liquidity. This is why it is crucial to study the features and limitations of each gold investment option before adding them to the portfolio.
How are Different Gold Investment Options Taxed in India?
Gold investment options are subject to tax at the time of sale and maturity. Physical gold, digital gold, gold mutual funds, etc., are subject to capital gains taxation and treated accordingly.
Notably, the holding period of the gold investment in India defines whether the proceeds are long-term capital gains (LTCG) or short-term capital gains (STCG).
Typically, proceeds on gold investments held for more than 3 years are considered to be long-term capital gains and attract LTCG tax. On the other hand, proceeds on gold investments held up to 3 years are treated as short-term capital gain and attract STCG tax.
Short-term capital gains on gold funds, physical gold, and digital gold are taxed as per the investor’s tax slab. On the other hand, long-term capital gain on gold funds is taxed as per tax slab, while gains on digital gold and physical gold are taxed at 20% post indexation.
In the case of gold ETFs, the investment option is taxed as per the investor’s tax slab regardless of their holding period. Note that the Finance Act 2023, removed the indexation benefit previously available to gold ETFs and funds. Subsequently, they are now subject to taxes as per the investor’s tax slab irrespective of the holding period.
Taxation of Sovereign Gold
There are four ways in which sovereign gold investment can be taxed.
Tax on interest
The interest earnings on sovereign gold bonds are taxed at 2.5%. The earnings are first added to the investor’s income for the applicable fiscal year and taxed as per the slab.
Tax on premature redemption
If the investment units are encashed prematurely but after a 5-year holding period, the gains are not taxed. Typically, the Reserve Bank of India offers a redemption period every 6 months after the investor has completed a 5-year lock-in period. Investors can encash their units prematurely only during this period.
Tax on maturity
If investors encash their sovereign gold bonds after 8 years, the resulting gains will be tax-free.
Tax treatment in the secondary market
If sovereign gold bonds are redeemed through the secondary market, the earnings will be subject to capital gains tax rules.
To recall, the gains from the bonds held for less than 3 years will be added to annual income and taxed as per the applicable tax slab. On the other hand, gains from the bonds sold after 3 years will be taxed at 20% post-indexation.
Hence, gold investments in India have distinct sets of features and benefits. Depending on one’s financial goals and risk-taking capacity, individuals should pick a gold investment option that suits their portfolio the most.
This further makes it crucial to assess risk-taking capacity and reevaluate financial goals to diversify the portfolio with suitable gold investment in India and other investment options.
