Are you planning to purchase gold this festive season? If yes, then you must know that you can invest in gold in various forms. These include physical gold, exchange-traded funds (ETFs), and Sovereign Gold Bonds (SGBs).
You should make a wise decision when choosing between these options as each has specific features and drawbacks associated with it. To help you choose, here is a comparative analysis of the three gold buying options.
- Physical gold
Being a tangible asset, which can be worn or displayed, one will always be emotionally attached to physical gold. Also, for an individual, it is easier to buy physical gold. You can buy it in the form of jewellery or in the form of gold biscuits and coins from jewellers. Apart from jewellers, you can buy gold coins from certain banks as well.
Features of physical gold
Confidentiality of possession: Unlike other forms of gold, physical gold is one of the few assets which can be retained completely private and confidential.
Hedge against inflation: Gold serves as a hedge against inflation and it is comparatively a stable investment during market volatility. Having gold in one's portfolio also assists in diversification.
Taxation benefits: Long-term capital gains (LTCG) will be applicable after a time period of three years. This means that if the difference between date of buying and the date of selling exceeds the period of three years, you will get the benefit of LTCG. These gains are taxed at 20 per cent along with indexation benefit and surcharge, if any, plus cess at 4 per cent.
- Gold exchange-traded funds (ETFs)
These are exchange-traded funds which can be purchased and sold on exchanges. Since the benchmark of gold ETF is physical gold price, you could buy it close to the actual price of gold. To buy gold ETFs you must have a trading account with any shareholder and should also have demat account. Unlike physical gold, which requires high initial buying and selling charges, gold ETF costs much lower.
Features of gold ETFs
Risk of theft: Compared to physical gold, there is very little risk of theft when investing in Gold ETFs.
Investment: Minimum investment can be made for as low as 1 gram of gold. Alternatively, you can invest via the SIP route rather than making investments in a lump sum and attempting to time the market.
Taxation benefits: If you keep gold ETFs for more than 3 years, the capital gain will be subjected to 20 percent tax post indexation.
Purity concern: Purity will not be a problem as they are held in electronic (demat) form. Also, due to its direct gold pricing, there is complete transparency in the holdings of an ETF.
- Sovereign Gold Bonds (SGB)
SGB are Government securities issued in multiples of one gram of gold. On behalf of the Government of India, these bonds are issued by the Reserve Bank of India (RBI) and are traded on an exchange. Moreover, these can be used as collateral for taking loans.
Features of SGB
Risk of theft: Risk of theft is lower when compared to physical gold.
Interest earned: The government has fixed an assured interest of 2.5 percent per annum on the issue price. The payment of interest is done half-yearly and the last instalment is payable on maturity along with the principal.
Taxation benefits: TDS (tax deducted at source) will not be applicable on interest. According to an RBI notification, the capital gains tax arising on redemption will be exempted for an individual. On transfer of bond, the indexation benefits will also be provided in case of LTCG arising to any person.
Purity concern: Gold bond prices are directly related to the price of gold of 999 purity (24 carats) which is published by India Bullion & Jewellers Association (IBJA)
