05 Apr 2021 · 4 min read
What is the best way to buy or invest in gold?
Gold has been the world's currency of choice from the time of ancient cultures to the present period. In India, gold does not just seem like an investment but as jewelry, gift, and status symbol.
How to invest in gold
Gold investment can be in 5 forms-
1) Physical Gold(Bars and Coins)
2)Gold ETFs( Exchange Traded Funds)
3)Gold Mutual Funds
4)Sovereign Gold Bonds
5) Digital Gold
Gold Rates over the years
Gold Return over time
Physical Gold
Anyone can invest in physical gold by purchasing gold coins or gold bars from jewelers, banks, or online stores (issued by MMTC), NBFCs, etc. Gold coins are usually of a standard denomination like 1,2, 5, and 10 gm, while bars are of 20 gm. These have a 24 karat purity and carry a hallmark of purity in compliance with BIS standards.
Note- If you are buying a piece of jewelry, it's considered for consumption, not for investment
Taxes on Physical Gold
If you invest in physical gold such as bars, coins or jewelry, any gains from the sale within three years from the date of purchase will be considered short-term capital gains (STCG); after three years, they will be considered long-term capital gains (LTCG).
STCG is added to your gross total income and taxed at your slab rate, whereas LTCG is taxed at 20.8% (including cess) with indexation benefits. You can claim tax exemption on LTCG under Section 54F of the Income-tax Act, 1961 if you use the funds to buy a residential property. The exemption will be proportional to the amount you invest. You can reinvest the entire amount and not just the gains.
Advantages
- No additional charges other than the physical gold itself.
- No need for a demat account.
- No paperwork required for investing.
Disadvantages
- Risks of theft and burglary associated with storing physical gold
- Design and making charges(making charges even for coins and bars)
- Impurity
Gold Mutual Funds
Gold Mutual Funds is a variant of Gold ETFs. These are schemes that mainly invest in gold ETFs and other related assets. Gold Mutual Funds do not directly invest in physical gold but take the same position indirectly by Investing in Gold ETFs.
Gold ETFs( Exchange Traded Funds)
Gold ETF invest in physical gold, gold mining companies, and even some debt security(to maintain liquidity).
Advantage
- Buying at fair value (market value, no spread)
- Minimum – Rs. 50 & Maximum – No limit
- Storage – You don’t have to bother
- Purity
- No GST – indirectly (input credit)
Disadvantage
- Tracking error
- Expense ratio
Taxation
20% plus 4% cess for long-term capital gains.
Suggestion
Better than Physical & Digital gold
Digital Gold
Buying from Fintech platforms – PayTM, Google Pay, Phone Paybuy from these three companies Safegold, MMTC, Augmont Gold
Advantage
- Buy as low as Re. 1
- Purity – Generally wont be a problem
- Storage – You don’t have to bother
- Instant credit on selling
Disadvantage
- GST – 3% (You buy 1000 rupees of gold, you get 970 worth of gold)
- Spread – High difference between buying and selling price (another 2-3% for storage, insurance & trustee fees)
- Absence of regulator
- Maximum holding period – Ex - MMTC investors will have to mandatorily take delivery or sell the gold purchased after five years or will have to pay extra charges decided by MMTC if the delivery is not taken.
Taxation
No capital gains tax. 2.5% interest is taxed at the slab rates.
Suggestion
Avoid
(4) Sovereign Gold Bond (SGB)
Buying through RBI on behalf of the central government
Advantages-
- Issued at a discount to the current market price
- Storage – You don’t have to bother
- No GST
- 2.5% interest paid by the government, over and above the capital gains
- Sovereign guarantee
Disadvantages
- Not backed by physical gold purchase unlike in digital gold & ETF where gold is actually bought. But there is a sovereign guarantee.
- Liquidity – It's an 8-year product. If you want to sell before 5 years, your selling price is secondary market determined which can be at a discount & there have been multiple such instances in the past
- Minimum – 1 gram, Max – 4 Kgs
- No physical delivery
Taxation
No capital gains tax, 2.5% interest is taxed at the slab rates
Suggestion
If you can buy/sell from the secondary markets, this is the best product to invest in, or else you have to mandatorily buy when the new issue comes and at that price which is not always great, and lock-in for 5-8 years. If secondary markets/timing are not, your thing, consider gold ETFs.
P.S. - While buying/selling in the secondary market, the no capitals gain tax on SGB is lost.
Why should you invest in gold?
Gold is considered one of the safest assets as its value increases over time. There is a limited gold supply on earth (Of course, It can change once we can mine asteroid or some other planets). Gold is one of the metals that can't be made from other metals. Its price doesn't fluctuate much over time. Let's understand with an example- Suppose there is 100 kg gold available on earth and by mining let's say anyone find 200 gm, It won't affect the price much as supply is increased by some percentage.
As you can see in the above graph, It has given good returns. Returns are better than FD and in 90% cases, even better than stocks
Disclaimer
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product.