Jigar M. Patel
International Tax Attorney
Investing in Gold – Ideal Hedge against Inflation!
Return on investment in Gold has overshadowed many asset classes in the recent past. It has also served as an excellent hedge against inflation making sense for a wise investor to diversify his portfolio by taking a reasonable exposure to this yellow metal.
Traditionally, the only option to buy gold was in the physical form, whether by way of ornaments or as bars or coins. Sovereign Gold Bonds (SGBs) issued by RBI, opened the option for investing in gold in digital form, without being bothered about the wiles and guiles of a goldsmith in the market. SGBs can be easily purchased and be held in the Demat form with no storage or security problems.
Tax Free Gains on Redemption – SGB’s Star Attraction
When SGB came to be launched in November 2015, the price of gold was Rs.23,000 per 10 gms, which recently peaked to Rs.61,000 in a span of less than 8 years, thus registering a healthy annualized growth of 14%. And imagine this appreciation coming tax free for a taxpayer in the 30% tax bracket, it virtually translates to an effective return of 20% per annum. This is the unique feather in the cap of SGB, which enjoys total tax exemption from capital gains on redemption after its tenure of 8 years.
Investment Features & Highlights
- SGBs rate as safe investment options for investors looking for a long-term investment of 5 to 8 years.
- While holding physical gold would be a dead investment, SGBs carry a coupon rate of interest of 2.5% per annum, though taxable.
- SGBs being available in multiples of 1gm are well within the reach of even a small investor.
- Redeemable after a period of 8 years, premature withdrawal for SGBs is permitted after 5 years.
- SGBs offer liquidity in case of need, as they can be used as collaterals for easily obtaining a loan.
How SGBs even Score Over Gold ETFs?
Units of Gold Exchange Traded Funds (ETFs) of Mutual Funds do compete with SGBs in terms of return on investment in the form of Digital Gold. However, SGBs score the brownie point through the total tax exemption on redemption. Even in case of premature withdrawal, long term capital gains (LTCG) earned on SGBs offer tax option of 10%, while similar gains on ETF have to pay 20% tax after indexation.
Post the recent tax amendment treating LTCG on ETFs invested after 1st April, 2023 as deemed short term capital gains (STCG), investment in SGBs clearly outscore on the tax front over Gold ETFs.
