Gold ETF, gold mutual funds, physical gold or sovereign gold bonds, which route should you take to invest in gold?
Gold is considered a safe haven to invest when there is increasing volatility or the risk of rising inflation and so on. So when the market is entering a riskier territory, go in for the yellow metal. It becomes doubly advantageous when it’s Akshaya Tritiya, an auspicious occasion to buy gold.
We give you the different options to buy gold.
These are mutual funds just like any other. They invest in physical gold or in units of a gold ETF, corresponding to the amount of money invested in them. In either case, their value tracks the price of gold. If you sell them within three years of purchase, you are taxed as per your slab on the gains. If you sell them after three years, you pay tax at 20% and get the benefit of indexation. Indexation raises your purchase cost in sync with inflation, for tax purposes, thereby reducing the amount of tax you have to pay.
Gold ETFs are just like gold mutual funds except that they are continuously traded on the stock exchange. The price of gold ETFs tracks the price of gold. These ETFs also hold physical gold corresponding to the money invested in them (in other words, their value is backed by physical gold holdings). The taxation of gold ETFs is just like the taxation of gold mutual funds described above.
You can go out and buy physical gold as coins, bars or jewellery from your nearest jeweller. The advantage of this is the element of physical possession – you can touch and feel the material. The disadvantages are the worry and costs of safety and transportation. Storing it at home exposes it to theft and storing it in a bank locker incurs rent. You also expose it to theft while transporting it. The taxation of physical gold is the same as the taxation of gold mutual funds. However, buying physical gold incurs GST of 3%. If you buy it as jewellery, there is an additional GST on the marking charges of 8% (of those charges).
In this method, you buy gold online with either Paytm or the Stockholding Corporation of India. These companies, in turn, store a corresponding amount of gold in a vault. In case of Paytm, you can leave it in the vault for up to five years. Thereafter you must either take delivery of your gold or sell it back to Paytm. There is usually a 4-5% difference between the buy and sell price quoted on Paytm at any given point in time. You also buy a 3% GST while buying gold in this manner.
5) Sovereign Gold Bond (SGB)
You can buy these from the websites of all major banks. These bonds are issued by the Government and track the price of gold. They have a tenure of eight years (however you can exit after five years). They pay an interest of 2.5% per annum on their face value, which is taxable. However, the maturity value of these bonds (including any gains in them) is tax-free. Resident Indian is allowed to buy gold from 1 gram to 4 kg per annum through SGBs.
Is gold a good long-term investment? Historical long-term returns on the asset are respectable, as this article shows. Gold also moves inversely to stocks, making it a good hedge in a portfolio that also holds stocks or equity mutual funds.