Question: I want to invest in gold. What should I buy for best returns: jewellery, biscuits, coins or gold ETFs?
- Ashish Nagarkar of Nagpur wants to know which form of investment in gold can be the most profitable. The returns from different options vary, with some scoring over others. Here are the pros and cons of investing in different forms of gold.
Answer: You can invest in different forms of gold depending on the usage, cost and the tax implication for each option.
The most common form of gold bought in India is 22-carat jewellery. The basic concern here is purity. Hallmarking for purity attracts an extra charge unless you can trust your goldsmith.
Advantages: The obvious appeal of jewellery is that you can use it even as it continues to gain in value. Also, there is no capital gains tax on profit from the sale of ornaments that are bought for one’s own use.
Disadvantages: You have to shell out making charges that range from Rs 60 per gram for a basic chain or bangle to Rs 400 per gram for more intricate designs sold at boutique jewellery houses. The non-refundable making charge pushes up the price of the ornaments by an average 10%, cutting into the potential gains.
Bars, Biscuits And Coins
These are available in 24-carat purity. At Rs 50-60 per gram, the making charges are lower than those on jewellery, unless you buy imported bars, which are 5-6% costlier. If gold is sold within three years, the profit is short-term capital gain and clubbed with the income of the investor. After three years, the profit is treated as long-term capital gain and taxed at 20% after indexation.
Advantages: The lower making charges are beneficial. Coins and biscuits are a good gift and there is an assurance of quality if bought from a reliable channel.
Disadvantages: As the price of bars includes the profit margin of the seller bank, it is always higher than the market price of gold. Their use is limited as opposed to jewellery, so the emotional benefit is not very high. Liquidity too is limited, because banks only sell gold and don’t buy it back. Also, the tax rate is higher.
Gold exchange traded funds (ETFs) can be held in demat form. They can be bought and sold like any other share or security through a stock broker after opening a demat account and a trading account.
Advantages: Gold ETFs have a low transaction cost (0.5% of value), high liquidity, convenience of trading, lower tax, no storage hassles and assurance of quality. If the holding period exceeds one year, the profit is treated as long-term capital gain and taxed at a flat 10% or 20% after indexation. In case of physical gold, this period is three years. Also, ETFs allow you to buy gold in small denominations of up to 500 mg at a time.
Disadvantages: You need to have a trading account with a broker and a demat account with a depository to be able to buy gold funds. Also, the buyer does not get to use the gold he owns.
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