Beginner’s Guide to Gold Investment In India

Did you know 20% of the world’s gold is investment? 

However, such physical gold is held by investors in the form of bars, coins, or simply as underlying assets such as gold mutual funds, gold ETFs, or as an alternative, i.e., digital gold. 

However, deciding which option of gold investment in India is most suited for one’s portfolio depends on several factors including risk appetite, returns, liquidity, and cost. 

That said, let us discuss more gold investments in India to gain a better understanding of the investment option and its key aspects. 

Why Should One Consider Investing in Gold?

Diversification of investment portfolios is the main reason why many seasoned investors choose to park money in gold. Notably, gold is considered to be a hedge against inflation and potential market volatility. Gold has historically reflected lower market volatility than investments in equity options.

Additionally, investments in gold are known to offer good returns over the years. In fact, often gold has reflected an inverse correlation to investment in equities. In other words, investments in gold have shown better returns when the equity market has faced a slump. 

That said, let us check out the gold options for investment in India where one can park their money for substantial returns. 

Gold Investment Options in India

Individuals can either invest in physical gold or digital gold to generate returns. Typically, in its physical form goods can be held as jewelry, bars, bullion, and coins. Based on one’s preference one can invest in any form of physical gold investment in India

However, the same is bound by a few limitations such as:

  • Making charges make purchase of gold expensive
  • Gold attracts storage expenses owing to its insurance and security requirements
  • The requirements of purity and origination certificate make selling gold inconvenient
  • Individuals have the option to avoid these limitations by simply opting for the digital route. Such an alternative route includes investments such as gold ETFs, sovereign gold bonds, digital gold, and gold mutual funds. 

Types of Digital Gold Investment

Here are the most preferred digital gold investment options in India

  • Digital Gold: These investment options can be purchased via apps in any denomination starting from 1 gram. 
  • Gold ETFs: Gold Exchange Traded Funds or gold ETFs are traded regularly on stock exchanges just like other investment options like shares. Notably, gold ETFs feature Physical Gold and Gold mining or refining stocks as the main underlying assets. In order to invest in gold ETFs, individuals must have a Demat account.
  • Gold Mutual Funds: Essentially mutual funds, they are managed by different asset management companies (AMCs) which follow a fund-of-fund structure. Gold mutual funds primarily park money into Gold ETFs. 
  • Sovereign Gold Bonds: The Reserve Bank of India (RBI) periodically releases these bonds. Individuals can easily access and buy them via leading private and public sector banking institutions. Notably, the returns on sovereign gold bonds are pegged to the price of gold and the same is backed by the government of India. However, it must be noted that sovereign gold bonds do not have physical gold as the underlying asset. 

Potential investors must also note that the performance of these gold investment options is closely related to the price of gold. However, the options tend to differ on the basis of risk, returns, lock-in period, liquidity, taxation, and even availability. 

Liquidity of Gold Investment in India

When it comes to investments, liquidity can be described as the ease with which investors can buy or sell them. Ideally, physical gold, gold ETFs, good mutual funds, and digital gold are highly liquid. This means they can be readily bought and sold. 

While sovereign gold bonds come with a maturity period of 8 years, individuals have the option to redeem them before maturity. Sovereign gold bond holders have two options to redeem units:

  1. They can prematurely encash the units after the 5-year lock-in period. However, if they want to redeem the bonds before the lock-in period then they have the option to list and sell the units in the secondary market. Notably, the secondary market has low volumes so investors may end up selling the bonds at a discounted rate compared to the prevailing gold price in India. Individuals can opt for this option only after the completion of 6 months from the date of issue. 
  2. Investors who don’t wish to sell or encash their gold investment options can consider taking out a loan against their bonds. Typically, leading financial institutions offer a portion of the gold Bond’s value as loan amount. 

Taxation of Gold Investment Options

Gold investments are subject to taxation at the time of selling or maturity. Notably, physical hold, gold mutual funds, gold ETFs, and digital gold are subject to capital gain taxation. Additionally, based on how long an investor holds the options of gold investment in India, the gains on them could be categorized as either short-term capital gains (STCG) or long-term capital gains (LTCG) and will be taxed accordingly. 

  • STGC: The gains on gold investment options held for up to 3 years or less are classified as short-term capital gains. 
  • LTCG: The gains on gold investment options held for more than 3 years is treated as long-term capital gains and are subject to LTCG tax.

Notably, sovereign gold bonds are taxed differently than other tax options. 

Taxation of Sovereign Gold Bonds

There are four ways in which gold investments can be taxed. The same are discussed below:

  • Tax on interest: The interest accrued on sovereign gold bonds is taxable (currently at the rate of 2.5% p.a). The interest amount is added to income for a given year and taxed as per the investor’s tax slab.
  • Tax on premature: Premature encashment of sovereign gold bonds isn’t subject to taxes based on when they are withdrawn. For instance, if an investor encashes units they have been holding for 5 years, the gains will be tax-free. Notably, the RBI offers a 6-month window after a 5-year lock-in period to encash units prematurely. 
  • Taxation on maturity: if investors hold sovereign gold bonds until maturity and then encash them after 8 years of the holding period, the gains will not be subjected to taxes. 
  • Taxation on secondary-market sale: Individuals who redeem their sovereign gold bonds via the secondary market will pay taxes on gains as per capital gain rules. If the units are sold before 3 years, the capital gains will be added to annual income and taxed as per the tax slab. If they sell the bonds after 3 years, the income tax rate will be levied at 20% post-indexation. 

These are the key features and basics investors need to know about options of gold investment in India. 

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