As it is said gold is the asset which might never lose its value and therefore it is used not only for jewellery but also works as a tool to tide over financial emergencies. Over the years, buying gold has traditionally been a financial support system and people in India used to purchase and keep it with themselves. But today with so many available methods/instruments, people usually get confused and asks how to invest in gold . Answering to that, there are broadly two ways for you to buy the gold - paper and physical.
Under the physical form, you can own the gold by purchasing-
- Gold Coins
- Gold bars
For buying physical gold, you can reach out to the neighborhood jewelers. Few jewelers have even started taking orders on their website and other E-commerce platforms such as Amazon India, Paytm and Snapdeal.
For paper gold, you can use-
- Gold Exchange Traded Funds (ETFs)
- Sovereign Gold Bonds (SGBs)
- Gold Mutual Funds (fund of funds which further invest in gold ETFs)
- Mutual Funds (fund of funds which invest in the shares of international gold mining companies)
Further, there is now a third option: Gold Accumulation Plans (GAP). These plans allow you to buy as little or as much as you want using the two options: 'Digital Gold', offered on the mobile wallet platform Paytm and 'GoldRush' offered by the Stock Holding Corporation of India. Both are offered in association with MMTC - PAMP.
Let us quickly understand the above mentioned instruments individually
Indians certainly cherish possessing gold, which is why there is no wonder that India is one of the largest consumers of the yellow metal in the world. Owning it in the form of jewellery has its own benefits and limitations such as-
- Satisfaction: Owning the Gold in the form of jewellery gives a sense of satisfaction to most of the people.
- Accessories: People in India often buy Gold jewelleries and accessories to wear on certain occasions.
- Unsafe: Keeping the jewellery safe is a big task and sometimes includes extra cost if you keep it at Bank locker.
- High Costs: Buying Jewellery is always more costly than buying a gold bar/coin or paper gold as there are making charges which are added to the cost, which typically ranges between 6 percent to 14 percent of the cost of gold (may go as high as 25 percent in case of special designs) are irrecoverable
- Outdated Designs: Gold jewellery can be designed as per the individual preference by paying a certain making charge. The limitation comes when you want to redesign your jewellery because you’ll have to repay the making charges.
Gold Coin Scheme
Gold coins can be bought from banks, jewellers, NBFCs, and now even e-commerce websites. The government has launched ingeniously minted coins which will have the Mahatma Gandhi engraved on one side and National Emblem of Ashok Chakra on the other. The coins are available in denominations of 5 and 10 grams while the bars will be for 20 grams.
- The Indian Gold Coin and Bar are of 24 karat purity and 999 fineness carrying advanced anti-counterfeit features and tamper proof packaging. They are hallmarked and are distributed through designated and recognized MMTC outlets or through specified bank branches which will give you the confidence about the product.
- MMTC also offers a buy back option for Indian Gold Coin, in intact tamper proof packaging and with original invoice, at the prevailing gold base rate.
- It is very easy to take loans against gold coins and bars, and therefore helps in stressed scenarios.
- Safety remains a continuous concern, keeping the coins at home make people insecure whereas keeping it at Banks attracts additional charges.
- Buying a gold coin/bar from an unauthorized dealer could lead to a risk of counterfeit. Also, at the time of selling, getting the fair value could be a task.
For details about the Gold Coin Scheme, click Here
Gold savings schemes
Gold or jewellery savings schemes allow you to deposit a fixed amount at a particular jeweller every month for the chosen tenure. And at the end, you can buy gold or any gold jewellery from the same jeweller at a value equivalent to the money you have deposited, including a bonus amount. This conversion is done at the gold price prevailing on maturity. In most cases, the jeweller adds one month's installment from his side at the end of the tenure as an incentive or may even offer a gift item.
Let us understand with an example- Say, if you have invested a fixed amount every month for 11 months. The 12th instalment, which is equal to your monthly contribution, is paid by the retailer. So, if you invest Rs 2,000 a month in the scheme, after 11 months you would have invested Rs 22,000 and the retailer will put in an additional Rs 2,000 as the last installment. So, you will be able to buy jewellery worth Rs 24,000 by paying only Rs 22,000.
- This method of buying gold makes it easy for everyone to afford. If you don’t have enough money at a time, you save and buy gold later with the help of this scheme.
- The bonus or additional amount paid by the retailer as a last instalment is a kind of return you get for the money that you have saved with the jeweller.
- If you expect the gold prices to fall during your saving tenure, then this scheme can turn out to be very good investment method as in the end you can buy the gold with at lower rate.
- If the gold prices rise by the end of your saving tenure, then in that case you’ll have to pay comparatively a higher amount and might turn out as a poor investment.
- There are many fake/ponzi gold schemes which might cost you your entire life savings. So, before investing in such schemes, do the required diligence and always invest in a scheme sponsored by any large and verified jewellery company.
- At the end of the scheme, if you buy the gold jewellery then you’ll have to face all those limitation mentioned earlier.
For few such gold savings schemes Click- Here
Gold exchange traded funds (ETF)
The most common way of owning paper gold in a more cost-effective manner is through gold exchange traded funds (Gold ETF). You can invest (buy and sell) in Gold ETF shares through stock exchange (NSE or BSE) with gold as the underlying asset. This gives them an edge over physically owning, buying and selling of jewellery, bars or coins. What you need is a trading account with a stock broker and a demat account to invest in Gold ETFs.
- Liquidity: You can sell your shares easily anytime on the exchange
- Safety: No need to worry about the security of the asset, as you doesn’t hold it physically.
- Purity: Purity of the gold is not a concern as the gold is held by the sponsoring party which is regulated and fully governed.
- Transparency: The transparency in pricing is another advantage as it trades probably the closest to the actual price of gold i.e. the benchmark is the physical gold price.
- Convenience: You may either buy in lump sum or even at regular intervals through systematic investment plans (SIP), making your investment in gold very easy, starting with a very small amount.
- Even though there are no entry or exit charges there is brokerage that needs to be accounted for every time you buy or sell gold ETF units.
- Fixed expense ratio will be charged for managing the fund, but it is generally low compared to other mutual funds and is around 1 percent.
- Tracking Error – ETF returns could vary comparing to the actual gold returns because of the fund's expenses and cash holdings which make its price slightly differ from actual gold price.
Sovereign Gold Bonds (SGB)
Sovereign Gold Bond is another way of owning paper gold. By investing in SGB, you will not get physical gold but will participate in any rise or fall in the price of gold. Investment in SGB is, therefore purely for the investment purpose and not for consumption needs.
- SGBs are government securities denominated in grams of gold. This Bond is issued by Reserve Bank on behalf of Government of India and can be purchased through various banks. Hence, it is 100% secured, pure and backed by real Gold.
- The price of SGB is close to the actual market price of gold, comparing to gold bought from jewellers or banks which generally comes at a premium, of somewhere around 10 percent.
- SGB's taxation is in favour of investors as the gains are exempted on maturity unlike physical gold where gains are subject to tax. We will further discuss it later.
- Concerns related to safety, high cost and outdated designs is not present while investing in SGB. Also there are no making charges and therefore reduces the overall cost.
- While investing in SGB, you get an additional interest of 2.5 per cent per annum till maturity.
- There is not cost involved while investing in SGB.
- SGB Matures after 8 years, the lock-in ends from the fifth year. Hence, it is illiquid in nature and benefits only to those who want to invest in gold for a longer period.
You can now purchase gold coins online. 'Digital Gold', is offered on the mobile wallet platform of Paytm and 'GoldRush' is offered by the Stock Holding Corporation of India on their website, while Motilal Oswal has launched Me-Gold, a digital gold online investment. All of these are offered in association with MMTC - PAMP, (a joint venture between public sector MMTC and Switzerland's PAMP SA)
- There is no minimum investment limit. You can invest in gold with as low as 1 Rupee. You can save on a regular basis by investing a fixed amount on regular intervals.
- As mentioned above, the companies are in association with MMTC and are regulated by the government. Therefore there is no need to worry about these companies and their schemes.
- The concern for the security of the physical gold is also not present here and neither do you have to worry about the purity of the yellow metal.
- You can even buy the physical gold from these Digital companies.
- People are not much aware about this method of buying/investing in gold. It is still at a very small stage.
- Lack of complete knowledge will lead an investor to invest any such company which is a fraud and might claim to be regulated or associated with MMTC.
How different forms of gold are taxed
According to current income tax laws, the taxation of physical form of gold depends on how long you have held the gold jewellery/coins. The capital gains arising from the sale of gold will be short-term or long-term depending on the time period for which the gold has been held.
The capital gains on sale of this form of gold will be classified as short-term, if the time difference between the buying and selling of gold is less than 3 years. Such short-term capital gains will be added to your gross total income and taxed at your applicable income tax rates as per your income slab.
If the time difference between buying and selling of gold exceeds the period of 3 years, then the capital gains are classified as long-term. These gains are taxed at 20 per cent along with surcharge, if any, plus cess at 4 per cent with the indexation benefit.
Also, one should remember that you will be charged Goods and Service Tax (GST) at the time of buying. The GST is charged at 3 per cent on the value of gold plus 5% on making charges.
The taxation of gold mutual funds and gold ETFs at the time of redemption is same as selling gold jewellery. If the time period is less than three years, then capital gains will be classified as short-term, added to the person's gross income, and taxed accordingly. On the other hand, if the time period exceeds three years, then these gains will be treated as long-term and taxed at 20 per cent plus cess with indexation benefit.
Taxation of returns from SGBs is different. It earns an interest of 2.5 per cent per annum which is taxable under the head Income from other sources at your applicable income tax rate. But the amount that you will receive on maturity after 8 years is linked to the gold prices prevailing at that time in the market. In this case, if any capital gains arise at the time of maturity, then those will be exempted from tax.
The taxation of digital gold is also the same as that of physical gold where the classification of capital gains, if any, will be dependent on the holding period.
Before investing in gold, get the clarity as to why you need to invest in gold.
- For immediate consumption, let’s say for marriage then there is no option but to buy it in physical form.
- For future use, then you should definitely go with paper gold or digital gold because it has various benefits over physical form and in future, you can exchange them for physical gold.
- If it is purely for investment purpose then invest in paper or digital gold. It is suggested to not have more than 10 percent of the total portfolio in gold.