Indians are into buying gold for centuries. However when it comes to investing in gold one may not be aware of options beyond jewellery and issues such as taxation, cost of investing associated with them.
In a country like India, gold has been one of the most preferred investment options for centuries. India is one of the largest consumers and importers of gold. Investments are primarily in the form of jewellery, while other forms of investment like gold ETFs, gold funds and gold savings schemes are a much more recent phenomenon. Irrespective of the mode of investment, gold as an asset class is unique in different respects. Therefore, you have to keep certain things in mind when you plan in investing in this asset class. Here are the top 5 things you should know about investing in gold.
Gold can be purchased in forms other than jewellery
For centuries, Indians have considered gold and jewellery as synonymous. However, it should be remembered that there are several other forms of investing in gold. Gold jewellery is the most preferred option, especially for marriages and other occasions. For investment purposes, you can consider purchasing gold bars or coins. But on resale, the price offered for gold coins and bars is generally at a discount.
Gold ETFs are another way of purchasing gold where the yellow metal will be held in demat form. Aspects such as purity and safety of the investment are taken care of in this option. However, you need to have a demat account for this. Investment in gold funds is yet another way of investing in gold. Gold funds invest in gold ETFs and there is no need for a demat account for this. Gold funds are suitable if you wish to invest for a longer timeframe.
Jewellers across the country offer gold savings schemes, wherein you can pay regular instalments for a certain period, at the end of which the accumulated amount can be used to purchase jewellery from that jeweller. This enables regular savings in gold; but the disadvantage is that you will be forced to purchase jewellery at the prevailing market price at the end of the period of investment.
Purchasing gold entails additional expenses
If you thought purchasing gold does not entail any additional charges, think again! Gold jewellery purchase requires you to pay making charges and wastage charges to the jeweller. You also need to incur storage costs for physical gold which is in the form of jewellery, coins and bars. As Gold ETFs require a demat account, you will need to spend on opening a demat account and also pay brokerage in some cases. When you exit gold funds and gold ETFs, you may be subject to an exit load if you sell the investment within a stipulated timeframe. These charges need to be kept in mind while choosing your investment option.
Gold is one of the most liquid forms of investment:
Irrespective of how you invest in gold, this is one of the most liquid forms of investments. Most Gold Funds and Gold SIPs are open-ended with no lock-in period and can be sold easily. Jewellery, coins and bars can be liquidated at your local jeweller. Banks offer gold loans against the gold you pledge with them. In this option, you don’t have to sell your gold, and short-term requirements of money can be met by taking a loan against your jewellery. Money lenders also offer this; however, keep in mind the exorbitant interest rates charged.
Gold cannot yield you regular income:
Despite being a liquid investment, investments in gold cannot give you a regular income, unlike many other investments. It is a useful option for hedging against inflation and can be held for capital appreciation. But there is no way of getting a regular interest income or dividend income from gold investments. The only exception can be gold funds with a dividend option, but these are too few and far between to present any real investing option.
Gold is also subject to tax
It is usually seen that the taxability aspect is not considered while investing in gold. This could be because tax rules for other investment options like mutual funds and fixed deposits are more popular. However, investing in gold also involves tax payments. Tax of 1% needs to be paid on cash purchases of jewellery above Rs. 5 lakhs. Bullion purchases above 10 grams weight will attract VAT of 1% when the purchase value is more than Rs. 2 lakhs. Investing in gold savings schemes per se does not attract tax. But, when you purchase jewellery at the expiry of the investment period, the taxability is similar to that of physical jewellery purchase.
Sale of gold ETFs within 3 years of purchase will require you to pay Short Term Capital Gains tax as per your tax bracket. Similarly, if you are selling after 3 years, you will be required to pay Long Term Capital Gains tax at 20% with indexation. Similarly, sale of gold fund units will also attract short term capital gains tax or long term capital gains tax, depending on the period of holding the investment.
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