It is not clear whether the Reserve Bank of India will issue Sovereign Gold Bonds again. In this scenario, which gold bonds, gold ETFs should I invest in to get similar returns?
Name withheld on request
Reply by Prithviraj Kothari, Managing Director of RiddiSiddhi Bullions Limited (RSBL)
In India, Sovereign Gold Bonds (SGBs) have gained significant popularity among investors looking for a safe and profitable alternative to physical gold and other common forms of gold investments. With the possible discontinuation of the Sovereign Gold Bonds (SGBs) by the Centre, you still have several other options for investing in gold-related financial products in India. Some popular forms of investment around gold are — Digital Gold, Gold ETFs, and Gold Mutual Funds.
Gold ETFs are funds that trade on the stock exchange and invest in physical gold. They offer high liquidity and low expense ratios compared to other gold investment products. Returns generally track the price of physical gold closely, providing similar performance to SGBs over time. Examples: Nippon India ETF Gold BeES, HDFC Gold ETF, SBI Gold ETF, etc
Digital Gold allows you to buy and hold gold in electronic form, backed by physical gold stored in secure vaults. Returns align with gold prices, but there may be storage and insurance charges over time. It’s ideal for small, regular investments. Buying and Liquidation is available 24*7, so you can take benefit of price appreciation anytime. Examples are Augmont, Groww, Gullak, etc
Gold Mutual Funds invest in Gold ETFs or gold mining companies, offering diversification and professional management. Similar to Gold ETFs, but with a slight difference due to management fees and the investment strategy of the fund. Examples: ICICI Prudential Regular Gold Savings Fund, Axis Gold Fund, Kotak Gold Fund, etc
For Rs 2 lakhs, spreading the investment across Gold ETFs, Gold MFs and Digital Gold could provide a balanced approach, offering both growth potential and risk diversification.
Taxation of gold investment
India holds the title of being the second-largest consumer of this precious metal globally, after China. Indian households have amassed a substantial 25,000 tonnes of gold, as highlighted in the July 2023 World Gold Council report. This quantity surpasses the gold reserves held in some of the advanced economies worldwide. The recent adjustments in the capital gains tax concerning gold investments within India carry substantial implications for investors in the market.
Taxation of physical gold
As per the new rule introduced in the Union Budget 2024, if physical gold (coins and jewellery) is sold within two years, the gains will be added to taxable income and taxed at the applicable income tax slab rates.
Taxation of gold mutual funds
If the units were purchased between April 1, 2023, and March 31, 2025, the gains accrued from their sale will be incorporated into the taxable income and subjected to taxation at the relevant income tax slab rates. This taxation is applicable regardless of the duration for which the units were held.
On the other hand, if the units are acquired after March 31, 2025, and subsequently sold within a period of less than two years, the gains will also be considered as part of the taxable income. They will then be taxed based on the applicable income tax slab rates in effect during that fiscal period.
A shorter holding period will promote medium-term investments. Short-term gains occur when an asset is sold within two years, and the profits are subject to taxation at the relevant income tax slab rates.
Alternatively, a shorter holding period will make buying mutual funds slightly more beneficial but the loss of indexation benefit will increase the tax liability upon sale, a report in Value Research noted.
Long-term gains are realized when an asset is sold after two years. In this case, a tax rate of 12.5% is imposed on the gains. It’s important to note that indexation benefits do not apply to long-term gains.
Taxation of Gold ETFs
> If the units were purchased between April 1, 2023, and March 31, 2025, the gains will be added to the taxable income and taxed at the applicable income tax slab rates irrespective of the holding period. This means that any gains from selling units within this time frame will be subject to income tax according to the prevailing slab rates from April 1, 2023, to March 31, 2025.
> On the other hand, if the units are bought after March 31, 2025, and sold before 12 months, the gains will be added to the taxable income and taxed at the applicable income tax slab rates. This implies that profits earned from selling units purchased after March 31, 2025, within less than 12 months of holding will be subjected to income tax based on the relevant slab rates at that time.
Short-term investors who intend to hold Gold ETFs for under a year should be aware that the new rules may lead to a higher tax burden in comparison to the previous system.
Long-term investors are set to gain from a reduced tax rate of 12.5% as opposed to the former 20%. Nevertheless, the elimination of indexation might partially counterbalance this advantage, particularly in the event of persistent high inflation.
For medium-term investors, gold ETFs have emerged as a relatively more appealing option. In the recent regulatory amendments, the attractiveness of gold ETFs has increased. Selling a gold ETF after a holding period of 12 months results in the gains being categorized as long-term. These gains are subject to a tax rate of 12.5 per cent, without the benefit of indexation. This stands in contrast to the prior regulations that mandated a holding period of three years for eligibility to a 20 per cent tax levy with the advantage of indexation.
Taxation of Sovereign Gold Bonds
Short-term investment in Sovereign Gold Bonds (SGBs) is subject to a new tax rule where if the SGBs are sold within 12 months, the gains will be included in the taxable income and taxed according to the applicable income tax slab rates.
According to Value Research’s note, the adjustment in the holding period may offer advantages to short-term investors of SGBs.
On the other hand, for long-term investment in SGBs, a new regulation stipulates that if the bonds are sold after 12 months, a 12.5% tax on gains will be levied without the provision of indexation.
SGB redemption
With regard to the taxation on redemption to the Reserve Bank of India (RBI), the latest rule confirms that there are no amendments to the existing taxation rules. If you redeem your SGBs with the RBI upon maturity or during the premature buyback windows, you will not be liable to pay any taxes.
Going by the tax tweaks in the recent Budget, for long-term investors, holding Sovereign Gold Bonds until maturity or selling them to the Reserve Bank of India (RBI) proves to be the most lucrative choice. The gains derived from SGBs are entirely tax-free, offering a compelling advantage for investors seeking a tax-efficient investment avenue, the report noted.